As filed with the Securities and Exchange Commission
on November 24, 1998
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. 52
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 53 [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)816-6474
(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)
(Approximate Date of Proposed Public Offering): Continuous
It is proposed that this filing becomes effective (check
appropriate
box):
[ ] Immediately upon filing pursuant to paragraph 485(b)
[X ] on November 27, 1998 pursuant to paragraph 485(b)
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Title of Securities Being Registered: Shares of Common
Stock/Shares of Beneficial Interest
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 Valuation of Shares;
Being Offered 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 Holders of Securities
Management of the Trust and
the Funds
16. Investment Advisory and Management of the Trust and
Other Services the Funds; Distributor
17. Brokerage Allocation Investment Objectives and
Management Policies; Distributor
18. Capital Stock and Other Securities Investment Objectives and
Management Policies; Purchase
of Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and Pricing Purchase of Shares; Redemption of
of Securities Being Offered 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
<PAGE>
SMITH BARNEY
Balanced
Fund
November 27, 1998
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.(R)
<PAGE>
PROSPECTUS
NOVEMBER 27, 1998
Smith Barney Balanced Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Smith Barney Balanced Fund (the "Fund") (formerly known as Smith Barney
Utilities Fund) is a diversified fund that seeks current income and long-term
capital appreciation. The Fund is one of a number of funds, each having dis-
tinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Salomon Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 16
- -------------------------------------------------
VALUATION OF SHARES 30
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 30
- -------------------------------------------------
PURCHASE OF SHARES 32
- -------------------------------------------------
EXCHANGE PRIVILEGE 40
- -------------------------------------------------
REDEMPTION OF SHARES 43
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 46
- -------------------------------------------------
PERFORMANCE 46
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 47
- -------------------------------------------------
DISTRIBUTOR 48
- -------------------------------------------------
ADDITIONAL INFORMATION 49
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
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 this Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end management investment company
that seeks current income and long-term capital appreciation by investing in
equity and debt securities. The Fund will maintain a target asset allocation
of approximately 60% of its total assets in equity securities and 40% of its
total assets in fixed-income securities. The Fund may also invest up to 25% of
its total assets in below investment grade securities. See "Investment Objec-
tive and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class O shares
(prior to June 12, 1998 called Class C shares) are offered only to persons who
held Class C shares on June 12, 1998, and a fifth Class of shares, Class Y
shares, is offered only to investors meeting an initial investment minimum of
$15,000,000. In addition, a sixth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Salomon Smith Barney and its affiliates. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase and are subject to
an annual service fee of 0.25% of the average daily net assets of the Class.
The initial sales charge may be reduced or waived for certain purchases. Pur-
chases of Class A shares 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 pur-
chase. See "Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain
redemptions. Class B shares are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.50% of the average daily net assets of the
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternative."
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.75% of the average
daily net assets of the Class L shares, and investors pay a CDSC of 1.00% if
they redeem Class L shares within 12 months of purchase. This CDSC may be
waived for certain redemptions. Until June 22, 2001, purchases of Class L
shares by investors who were holders of Class C shares of the Fund on June 12,
1998 will not be subject to the 1.00% initial sales charge. The Class L shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A and Class B shares. Purchases of Fund shares, which when
combined with current holdings of Class L 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 O Shares. Class O shares are available for purchase only by sharehold-
ers who owned Class C shares of the Fund on June 12, 1998. Class O shares are
sold at net asset value and purchases of Class O shares will not be subject to
an initial sales charge of 1.00% of the purchase price until June 22, 2001.
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 O shares, and invest-
ors pay a CDSC of 1.00% if they redeem Class O shares within 12 months of pur-
chase. The CDSC may be waived for certain redemptions. The Class O shares' dis-
tribution fee may cause that Class to have higher expenses and pay lower divi-
dends than Class A and Class B shares. Purchases of Fund shares, which when
combined with the current holdings of Class O 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 redemp-
tions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. 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:
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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
investment alternative, Class B 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, Class L shares which have a lower initial sales charge
but are subject to higher distribution fees than Class A shares, are suitable
for investors who are investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or unde-
termined time frame.
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 L 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 L
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 will 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 pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in other Smith Barney Mutual Funds listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares."
Salomon Smith Barney Financial Consultants may receive different compensa-
tion for selling different Classes of shares. Investors should understand that
the purpose of the CDSC on the Class B and Class L 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 among the Classes of
shares.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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. Investors may also be eligible to participate in the
Smith Barney ExecChoice(TM) Program. Class A and Class L shares are available
without a sales charge as investment alternatives under both of these pro-
grams. See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Pro-
grams."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to dis-
tribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, may purchase shares directly from
the Fund through the Fund's transfer agent, First Data Investors Services
Group, Inc. ("First Data" or the "Transfer Agent"). See '"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open
an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed Retirement Plan. Investors in Class Y shares may open an account for
an initial investment of $15,000,000. Subsequent investments of at least $50
may be made for all Classes. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the minimum initial
investment requirement for Class A, Class B and Class L shares and the minimum
subsequent investment requirement for all Classes is $25. The minimum invest-
ment requirements for purchases of Fund shares through the Systematic Invest-
ment Plan are described below. There is no minimum investment required in
Class A for unitholders who invest distributions from a UIT sponsored by Salo-
mon Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum 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."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
MANAGEMENT OF THE TRUST AND THE FUND Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith Bar-
ney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial servic-
es--asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading--and use diverse chan-
nels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty. See "Management of the Trust
and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset value next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund is generally quoted daily in
the financial section of most newspapers and is also available from Salomon
Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
quarterly 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 a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The Fund will be affected by
general changes in interest rates which will result in increases or decreases
in the market value of the debt securities held by the Fund; the market value
of the debt securities held by the Fund can be expected to vary inversely to
changes in prevailing interest rates. The Fund may invest up to 25% of its
assets in lower-rated fixed-income securities, which securities (a) will
likely have some quality and protective characteristics that, in the judgment
of a rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in accor-
dance with the terms of the securities. Certain of the investments
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
held by the Fund and certain of the investment strategies and techniques that
the Fund may employ might expose it to certain risks. The investments present-
ing the Fund with risks are low-rated securities, as described above, foreign
securities and non-publicly traded and illiquid securities. The investment
strategies and techniques presenting the Fund with risks are entering in repur-
chase agreements, lending portfolio securities, engaging in short sales against
the box and entering into transactions involving options and futures contracts.
See "Investment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND CLASS A CLASS B CLASS L CLASS O* CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 5.00% None 1.00% 1.00% None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower) None** 5.00% 1.00% 1.00% None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management fees 0.65% 0.65% 0.65% 0.65% 0.65%
12b-1 fees*** 0.25 0.75 1.00 0.70 None
Other expenses 0.15 0.12 0.09 0.13 0.02
- -------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.05% 1.52% 1.74% 1.48% 0.67%
- -------------------------------------------------------------------------------
</TABLE>
* Class C shares were renamed Class O shares effective June 12, 1998.
** 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 L shares and Class O shares
do not have a conversion feature and, therefore, are subject to an ongoing
distribution fee. As a result, long-term shareholders of Class L shares
and Class O shares may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. (the "NASD").
Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, 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 Salomon 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 L, Class O and certain Class A shares the length of time
the shares are held
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
and whether the shares are held through the Smith Barney 401(k) and
ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of Shares."
Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of the value
of average daily net assets of Class A shares. Salomon Smith Barney also
receives an annual 12b-1 fee of 0.75% of the value of average daily net assets
of Class B shares, consisting of a 0.50% distribution fee and a 0.25% service
fee. In Class L shares, Salomon Smith Barney receives an annual 12b-1 fee of
1.00% of the value of average daily net assets of this Class, consisting of a
0.75% distribution fee and a 0.25% service fee. In Class O shares, Salomon
Smith Barney receives an annual 12b-1 fee of 0.70% of the value of average
daily net assets of this Class, consisting of a 0.45% distribution fee and a
0.25% service fee. "Other expenses" in the above table include fees for share-
holder services, custodial fees, legal and accounting fees, printing costs and
registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares", "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A $60 $82 $105 $172
Class B 65 78 93 168
Class L 38 64 103 213
Class O 35 56 90 185
Class Y 7 21 37 83
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A 60 82 105 172
Class B 15 48 83 168
Class L 28 64 103 213
Class O 25 56 90 185
Class Y 7 21 37 83
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. The information set
out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1998 Annual Report, which is
incorporated by reference into the Statement of Additional Information.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED JULY 31 1998 1997 1996 1995 1994 1993(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $15.53 $14.51 $14.03 $13.28 $15.97 $14.36
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.70 0.80 0.83 0.85 0.56 0.66
Net realized and unrealized
gain (loss) on investments 1.80 1.36 0.47 0.82 (1.92) 1.72
- --------------------------------------------------------------------------------
Total Income (Loss) From
Operations 2.50 2.16 1.30 1.67 (1.36) 2.38
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.68) (0.82) (0.82) (0.82) (0.83) (0.64)
Net realized gains (0.83) (0.32) -- (0.08) (0.50) (0.13)
Capital -- -- -- (0.02) -- --
- --------------------------------------------------------------------------------
Total Distributions (1.51) (1.14) (0.82) (0.92) (1.33) (0.77)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.52 $15.53 $14.51 $14.03 $13.28 $15.97
- --------------------------------------------------------------------------------
TOTAL RETURN 16.70% 15.48% 9.21% 13.24% (8.99)% 17.01%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 279 $ 248 $ 266 $169 $41 $54
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.05% 1.06% 1.04% 1.07% 1.07% 1.07%+
Net investment income 4.29 5.29 5.55 6.36 5.54 5.67+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 110% 45% 58% 36% 28% 37%
- --------------------------------------------------------------------------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED 7/31/98 7/31/97 7/31/96 7/31/95 7/31/94 7/31/93 7/31/92(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $15.52 $14.51 $14.02 $13.28 $15.97 $14.83 $13.95
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.62 0.73 0.77 0.78 0.75 0.79 0.35
Net realized and
unrealized gain (loss)
on investments 1.80 1.35 0.47 0.82 (2.19) 1.30 0.89
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 2.42 2.08 1.24 1.60 (1.44) 2.09 1.24
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.62) (0.75) (0.75) (0.76) (0.75) (0.80) (0.35)
Net realized gains (0.83) (0.32) -- (0.08) (0.50) (0.15) --
Capital -- -- -- (0.02) -- -- (0.01)
- ----------------------------------------------------------------------------------------------
Total Distributions (1.45) (1.07) (0.75) (0.86) (1.25) (0.95) (0.36)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $16.49 $15.52 $14.51 $14.02 $13.28 $15.97 $14.83
- ----------------------------------------------------------------------------------------------
TOTAL RETURN 16.17% 14.88% 8.78% 12.62% (9.52)% 14.69% 8.98%++
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 740 $ 951 $1,310 $1,573 $1,823 $2,766 $1,721
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.52% 1.52% 1.55% 1.56% 1.54% 1.56% 1.57%+
Net investment income 3.87 4.85 5.13 5.82 5.07 5.17 5.78+
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 110% 45% 58% 36% 28% 37% 10%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from March 1, 1992 to July 31, 1992.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED 2/28/92 2/28/91 2/28/90 2/28/89(1)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.21 $12.93 $12.09 $12.00
- ---------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.82 0.88 0.87 0.64
Net realized and unrealized gain on
investments 0.94 0.40 1.08 0.17
- ---------------------------------------------------------------------------
Total Income From Operations 1.76 1.28 1.95 0.81
- ---------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.90) (0.90) (0.57)
Net realized gains (0.15) (0.10) (0.21) (0.15)
Capital (0.03) -- -- --
- ---------------------------------------------------------------------------
Total Distributions (1.02) (1.00) (1.11) (0.72)
- ---------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.95 $13.21 $12.93 $12.09
- ---------------------------------------------------------------------------
TOTAL RETURN 13.63% 10.46% 16.34% 6.80%++
- ---------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $1,275 $ 707 $ 604 $ 416
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.58% 1.65% 1.70% 1.77%+
Net investment income 6.04 6.89 6.83 6.99+
- ---------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 33% 31% 50% 46%
- ---------------------------------------------------------------------------
</TABLE>
(1) For the period from March 28, 1988 (inception date) to February 28, 1989.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
PERIOD ENDED JULY 31 1998(/1/)
- -----------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.14
- -----------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.02
Net realized and unrealized loss (0.41)
- -----------------------------------------------
Total Loss From Operations (0.39)
- -----------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income --
Net realized gains (0.23)
- -----------------------------------------------
Total Distributions (0.23)
- -----------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.52
- -----------------------------------------------
TOTAL RETURN++ (2.28)%
- -----------------------------------------------
NET ASSETS, END OF PERIOD (000S) $ 486
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.74%
Net investment income 2.51
- -----------------------------------------------
PORTFOLIO TURNOVER RATE 110%
- -----------------------------------------------
</TABLE>
(1) For the period from June 15, 1988 (inception date) to July 31, 1998.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS O(1) SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED JULY 31 1998(2) 1997(2) 1996 1995(3) 1994 1993(4)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $15.53 $14.51 $ 14.02 $13.28 $15.97 $15.17
- ----------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.64 0.73 0.77 0.78 0.73 0.35
Net realized and
unrealized gain (loss)
on investments 1.79 1.36 0.47 0.82 (2.17) 0.86
- ----------------------------------------------------------------------------------
Total Income (Loss) From
Operations 2.43 2.09 1.24 1.60 (1.44) 1.21
- ----------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.63) (0.75) (0.75) (0.76) (0.75) (0.39)
Net realized gains (0.83) (0.32) -- (0.08) (0.50) (0.02)
Capital -- -- -- (0.02) -- --
- ----------------------------------------------------------------------------------
Total Distributions (1.46) (1.07) (0.75) (0.86) (1.25) (0.41)
- ----------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $16.50 $15.53 $ 14.51 $14.02 $13.28 $15.97
- ----------------------------------------------------------------------------------
TOTAL RETURN 16.19% 15.01% 8.80% 12.62% (9.52)% 8.08%++
- ----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S) $8,838 $9,381 $11,441 $3,925 $1,894 $ 252
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.48% 1.47% 1.50% 1.51% 1.48% 1.49%+
Net investment income 3.89 4.89 5.19 5.77 5.13 5.25+
- ----------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 110% 45% 58% 36% 28% 37%
- ----------------------------------------------------------------------------------
</TABLE>
(1) On June 12, 1998 Class C shares were renamed Class O shares.
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(4) For the period from February 4, 1993 (inception date) to July 31, 1993.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR END JULY 31 1998(1) 1997 1996(2)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.56 $ 14.52 $14.88
- -----------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.76 0.83 0.64
Net realized and unrealized gain (loss) on
investment 1.74 1.38 (0.29)
- -----------------------------------------------------------------------
Total Income From Operations 2.50 2.21 0.35
- -----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.71) (0.85) (0.71)
Net realized gains (0.83) (0.32) --
- -----------------------------------------------------------------------
Total Distributions (1.54) (1.17) (0.71)
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.52 $ 15.56 $14.52
- -----------------------------------------------------------------------
TOTAL RETURN 16.67% 15.88% 2.28%++
- -----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $1 $24,676 $7,617
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.67% 0.67% 0.78%+
Net investment income 5.00 5.58 5.54+
- -----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 110% 45% 58%
- -----------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from October 9, 1995 (inception date) through July 31,
1996.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income and long-
term capital appreciation. The Fund's investment objective may be changed only
with the approval of a majority of the Fund's outstanding shares. There can be
no assurance that the Fund will achieve its investment objectives.
INVESTMENT APPROACH
The Fund is managed as a balanced fund and invests in equity and debt securi-
ties. The Fund will maintain a target asset allocation of approximately 60% of
its total assets in equity securities and approximately 40% of its total assets
in fixed-income securities. The Fund has the additional flexibility to invest a
minimum of 50% and a maximum of 70% of its total assets in equity securities
and a minimum of 30% and a maximum of 50% of its total assets in fixed-income
securities. The Fund may also invest up to 25% of its total assets in fixed-
income securities rated less than investment grade by a nationally recognized
statistical rating organization ("NRSRO") such as Moody's Investors Services,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"). Such securities
are commonly referred to as "junk bonds."
EQUITY INVESTMENTS
With the equity portion of the Fund, MMC seeks to achieve its investment
objective by investing in equity securities (consisting of common stocks, pre-
ferred stocks, warrants and securities convertible into common stocks) which in
the opinion of MMC, are deemed to afford attractive opportunities for capital
appreciation and income. The Fund may invest in securities of companies with
attractive relative valuations based on underlying assets or earning potential,
as well as the securities of companies with favorable growth prospects. In ana-
lyzing securities for investment, MMC considers many factors including, but not
limited to, historical and future earnings and growth potential, current market
valuation, management strategy and economic and financial factors that may
affect the price of the securities. Typically, the Fund invests in a broadly
diversified portfolio across a wide range of industries consisting of middle to
large capitalization companies, though it may on occasion invest in smaller
capitalized companies when, in the opinion of MMC, such companies offer attrac-
tive capital appreciation opportunities.
FIXED INCOME INVESTMENTS
With the fixed-income portion of the Fund, MMC seeks to achieve its invest-
ment objective by investing in a diversified portfolio of fixed-income securi-
ties that are believed to afford opportunities for income and capital apprecia-
tion. Fixed-income securities the Fund will invest in include obligations of
the U.S. government, its agencies and instrumentalities, corporate securities
(including bonds, notes, and convertible issues), mortgage backed and asset-
backed securities. The
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fixed-income management strategies will be driven by the shape of the yield
curve and yield spread analysis. There are no maturity restrictions on the
fixed-income securities in which the Fund invests. Under normal market condi-
tions the weighted average portfolio maturity for the fixed-income portfolio
will be in the 5 to 15 year range.
The Fund may also invest up to 25% of its total assets in fixed-income secu-
rities rated below investment grade by any NRSRO such as Moody's and S&P. Such
securities are commonly referred to as "junk bonds." The Fund may also hold,
from time to time, securities rated Caa by Moody's or CCC by S&P or, if unrated
or rated by other NRSROs, securities of comparable quality as determined by
MMC. While this portion of the securities held by the Fund are expected to pro-
vide greater income and possibly, opportunity for greater gain than investments
in more highly rated securities, they may be subject to greater risk of loss of
income and principal and are more speculative in nature. See "Risk Factors and
Special Considerations--Low-Rated Securities."
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio securi-
ties, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing
and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below. Certain investment restrictions, including fundamen-
tal restrictions as well as restrictions that may be changed without a share-
holder vote, adopted by the Trust are described in the Statement of Additional
Information.
U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certifi-
cates of indebtedness, notes and bonds issued by the United States Treasury or
by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the
United States government to purchase the agency's obligations; still others,
such as those of the Student Loan Marketing Association, are supported only by
the credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing secu-
rities, although, as a result, the yields available from U.S. government secu-
rities are generally lower than the yields available from interest-bearing cor-
porate securities.
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Zero Coupon Bonds. 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 obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.
Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its right to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of
the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same securities at an agreed-upon price and date. The Fund typically will
invest the proceeds of a reverse repurchase agreement in money market instru-
ments or repurchase agreements maturing not later than the expiration of the
reverse repurchase agreement. This use of the proceeds is known as leverage.
The Fund will enter into a reverse repurchase agreement for leverage purposes
only when the interest income to be
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The Fund also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when the sale of
the Fund's securities is considered to be disadvantageous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by Government National Mortgage Association ("GNMA"), FNMA and Fed-
eral Home Loan Mortgage Corporation ("FHLMC"). In a forward roll transaction,
the Fund sells a mortgage security to a financial institution, such as a bank
or broker-dealer and simultaneously agrees to repurchase a similar security
from the institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with dif-
ferent 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 securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by MMC to be liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is maintained.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by MMC to be liquid and unencumbered and are
marked to market daily pursuant to guidelines
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
established by the Trustees. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. 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 certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies' obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certifi-
cates that are structured to direct payments on underlying collateral to dif-
ferent series or classes of the obligations.
To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
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 effect 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
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 secu-
rities are subject to prepayments, which may shorten the weighted average life
of such securities and may lower their return.
Lending Portfolio Securities. Consistent with applicable regulatory require-
ments, the Fund may lend its portfolio securities to brokers, dealers and other
financial organizations. The Fund's loans of securities will be collateralized
by cash, letters of credit or U.S. government securities that are maintained at
all times in an amount at least equal to the current market value of the loaned
securities. By lending its securities, the Fund seeks to generate income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as col-
lateral.
Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for securities of the same issue as the securities sold short. Short
sales of this kind are referred to as "against the box."
Options Activities. The Fund may write (that is, sell) call options ("calls")
if the calls are covered throughout the life of the option. A call is covered
if the Fund (a) owns the optioned securities, (b) maintains in a segregated
account with the Trust's custodian, PNC Bank, National Association ("PNC
Bank"), cash, U.S. government securities, equity securities or debt securities
of any grade having a value equal to or greater than the Fund's obligations
under the call, provided such securities have been determined by MMC to be liq-
uid and unencumbered pursuant to guidelines established by the Trustees ("eli-
gible segregated assets") or (c) owns an offsetting call option. The aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash or other eligible segregated assets, together
with the aggregate value of the obligations underlying put options written by
the Fund, will not exceed 50% of the Fund's net assets. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the under-
lying security at any time during the call period (usually not more than nine
months in the case of common stock or fifteen months in the case of U.S. gov-
ernment securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund forgoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase calls on securities. The Fund also may
purchase and sell stock index calls which differ from calls on individual secu-
rities in that they
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
are settled in cash based on the values of the securities in the underlying
index, rather than by delivery of the underlying securities. In writing a call
on a stock index, the Fund receives a premium and agrees that during the call
period purchasers of a call, upon exercise of the call, will receive an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call. When the Fund buys a call on a
stock index, it pays a premium and during the call period the Fund, upon exer-
cise of the call, receives an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call.
The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the obligations underlying puts written by the Fund, together with the
aggregate value of the obligations underlying calls on securities which are
written by the Fund and covered with cash, cash equivalents or U.S. government
securities, will not exceed 50% of the Fund's net assets. The Fund also may
write "straddles," which are combinations of secured puts and covered calls on
the same underlying security.
The Fund will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Fund if the premium, plus
commis-
22
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
sion costs, paid to purchase the call or put is less (or greater) than the pre-
mium, less commission costs, received on the sale of the call or put. A gain
also will be realized if a call or put which the Fund has written lapses unex-
ercised, because the Fund would retain the premium. See "Dividends, Distribu-
tions and Taxes" below. The Fund will purchase and sell only options which are
listed on a national securities exchange and will write options only through a
national options clearing organization.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including GNMA certificates and the characteristics and risks of
stock index options transactions.
Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona fide hedg-
ing purposes (or that the underlying commodity value of the Fund's long posi-
tions not exceed the sum of certain identified liquid investments) and (b) the
Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash or other eligible segregated assets equal to the
market value of futures contracts purchased will be maintained in a segregated
account with PNC Bank. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing corpora-
tions, guarantee performance of the contracts. Currently, there are interest
rate futures contracts based on securities such as long-term Treasury bonds,
Treasury notes, GNMA certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of the interest rate futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. government securities
and MMC anticipates a rise in long-term interest rates, the Fund could, in lieu
of disposing of its portfolio securities, enter into interest rate futures con-
tracts for the sale of similar long-term securities. If interest rates
increased and the value of the Fund's securities declined, the value of the
Fund's interest rate futures contracts would increase, thereby protecting the
Fund by preventing the net asset value from declining as much as it otherwise
would have declined. Similarly, entering into interest rate futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities
other than the underlying securities. For example, if MMC expects long-term
interest rates to decline, the Fund might enter into interest rate futures con-
tracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
that it intends to purchase, while continuing to hold higher-yielding short-
term securities or waiting for the long-term market to stabilize.
The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases puts on securities provided
they are similarly "secured". The purchase of call options on interest rate
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract, and the Fund will set aside cash and cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Options Activities" and "Dividends, Distri-
butions and Taxes."
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of
24
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the contract period. When the Fund enters into a stock index futures contract,
it must make an initial deposit, known as "initial margin," as a partial guar-
antee of its performance under the contract. As the value of the stock index
fluctuates, either party to the contract is required to make additional margin
deposits, known as "variation margin," to cover any additional obligation that
it may have under the contract. The Fund may not at any time commit more than
5% of its total assets to initial margin deposits on futures contracts.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on MMC's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes withheld prior to distribution. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar. Many of the foreign securities held
by the Fund will not be registered with, nor will the issuers thereof be sub-
ject to the reporting requirements of, the SEC. Accordingly, there may be less
publicly available information about the securities and the foreign company or
government issuing them than is available about a domestic company or govern-
ment entity. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payment positions.
25
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when MMC believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
Eurodollar or Yankee Obligations. The Fund may invest in Eurodollar and Yan-
kee obligations. Eurodollar bank obligations are dollar denominated debt obli-
gations issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee obligations are dollar denominated obliga-
tions issued in the U.S. capital markets by foreign issuers. Eurodollar (and
to a limited extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might pre-
vent dollar denominated funds from flowing across its borders. Other risks
include: adverse political and economic developments in a foreign country; the
extent and quality of government regulation of financial markets and institu-
tions; the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"). Because Rule 144A Securities are freely transferable among
qualified institutional buyers, a liquid market may exist among such buyers.
The Board of Trustees has adopted guidelines and delegated to MMC the daily
function of determining and monitoring liquidity of Rule 144A Securities. How-
ever, the Board of Trustees maintains sufficient oversight and is ultimately
responsible for the liquidity determinations. Investments in restricted secu-
rities such as Rule 144A Securities could have the effect of increasing the
level of illiquidity in the Fund to the extent that there is temporarily no
market for these securities among qualified institutional buyers.
Real Estate Investment Trusts. The Fund may invest in real estate investment
trusts ("REITs"). REITs are pooled investment vehicles that invest primarily
in either real estate or real estate related loans. The value of the REIT is
affected by changes in the value of the properties owned by the REIT or secu-
rity mortgage loans held by the REIT. REITs are dependent upon cash flow from
its investments to repay financing costs and the management skill of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate.
26
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations, such as those
described below:
General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain of the strategies and techniques used by the Fund depend on fore-
casts made by MMC that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
27
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates.
Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of an increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.
Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those lim- its, the Fund could be prevented from promptly liquidating unfavor-
able positions and thus be subjected to losses. Losses incurred in hedging
transactions and the
28
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
costs of these transactions will affect the Fund's performance. Successful use
of stock index futures by the Fund for hedging purposes is subject to the abil-
ity of MMC to correctly predict movements in the direction of the stock market.
Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney,depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That fail-
ure could have a negative impact on the Fund's operations, including the han-
dling of securities trades, pricing and account services. MMC and eSalomon
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, MMC has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that MMC, Salomon Smith Barney or any other service provider
will be successful, or that interaction with other non-complying computer sys-
tems will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney and
certain of its affiliated brokers. The Fund may use Salomon Smith Barney or a
Salomon Smith Barney-affiliated broker in connection with a purchase or sale of
securities when MMC believes that the charge for the transaction does not
exceed usual and customary levels. The Fund also may use Salomon Smith Barney
as a commodities broker in connection with entering into futures contracts and
commodity options. Salomon Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Salomon Smith Barney to its
most favored clients for comparable trades in comparable accounts. In selecting
a broker for a transaction, including Salomon Smith Barney or its affiliates,
the primary consideration is prompt and effective execution of orders at the
most favorable price. Subject to that primary consideration, dealers may be
selected for research, statistical or other services to enable MMC to supple-
ment its own research and analysis with the views and information of other
securities firms.
29
<PAGE>
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further informa-
tion regarding the Trust's valuation policies with respect to the Fund is con-
tained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. Dividends from
net investment income, if any, of the Fund will be declared and paid quarterly.
Distributions of
30
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
any net long-term capital gains earned by the Fund will be made annually after
the close of the fiscal year in which they are earned. Distributions of short-
term capital gains may be paid more frequently with dividends from net invest-
ment income. In order to avoid the application of a 4% nondeductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gains, the Fund may make such additional distributions as may be neces-
sary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B, Class L and Class O shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B, Class L and Class O
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class L, Class O and Class Y
shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. 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 sharehold-
ers.
Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Generally,
31
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
dividends of investment income (to the extent derived from most types of divi-
dends from domestic corporations) from the Fund will qualify for the Federal
dividends-received deduction for corporate shareholders. Each shareholder of
the Fund will receive a statement annually from the Trust, which will set
forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and the portion of the distributions that qualifies for the dividends-
received deduction.
Shareholders should consult their tax advisers about the status of the
Fund's dividends and distributions for Federal, state and local tax liabili-
ties.
PURCHASE OF SHARES
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to pur-
chase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE AS A % OF DEALERS
AS A % OF AMOUNT REALLOWANCE AS % OF
AMOUNT OF INVESTMENT TRANSACTION INVESTED OFFERING PRICE
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$ 25,000 - $ 49,999 4.00% 4.21% 3.60%
$ 50,000 - $ 99,999 3.50% 3.63% 3.15%
$100,000 - $249,999 3.00% 3.09% 2.70%
$250,000 - $499,999 2.00% 2.04% 1.80%
$500,000 and over * * *
- ----------------------------------------------------------------------
</TABLE>
* 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 Salomon Smith Barney, which compensates Salomon 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, Class L and Class O shares is waived. See
"Deferred Sales Charge Provisions" 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. 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 indi-
vidual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a
CDSC payable upon certain redemptions. See "Deferred Sales Charge Provisions"
below. Until June 22, 2001, purchases of Class L shares by investors who were
holders of Class C shares of the Fund on June 12, 1998 will not be subject to
the 1.00% initial sales charge.
Class O Shares. Until June 22, 2001, purchases of Class O shares by invest-
ors who were holders of Class C shares of the Fund on June 12, 1998 will not
be subject to the 1.00% initial sales charge which will apply on and after
that date.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial Consul-
tant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B,
Class L or Class Y shares. (Class O shares are available for purchase only by
shareholders who owned Class C shares of the Fund on June 12, 1998.) Salomon
Smith Barney and Dealer Representatives 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 the Transfer
Agent are not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class A, Class B and Class L shares and 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
required for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments for Class A shares for employees of Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest distributions from a UIT
sponsored by Salomon Smith Barney, and Directors/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 the Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial Con-
sultant 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 a Dealer Repre-
sentative 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 the
Fund's agent prior to its close of business. For shares purchased through Salo-
mon Smith Barney or a Dealer Representative purchasing through Salomon Smith
Barney, payment for Fund shares is due on the third business day after the
trade 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized 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 on a monthly or quarterly basis, as
indicated by the shareholder, to provide for systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon 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 Salomon Smith Barney Financial Consultant.
34
<PAGE>
PURCHASE OF SHARES (CONTINUED)
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-shar-
ing or other benefit plan 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 Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 that is offered with a sales charge) and
who wish to reinvest their redemption proceeds in the Fund, provided the rein-
vestment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of Citigroup;
(f) direct rollovers by plan participants of distribution from a 401(k) plan
offered to employees of Citigroup or its subsidiaries or a 401(k) plan enrolled
in the Smith Barney 401(k) Program (Note: subsequent investments will be sub-
ject to the applicable sales charge); (g) purchases by separate accounts used
to fund certain unregistered variable annuity contracts; (h) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and (i) purchases
by investors participating in a Salomon Smith Barney fee-based arrangement. In
order to obtain such discounts, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of other Smith Barney Mutual Funds that are
offered with a
35
<PAGE>
PURCHASE OF SHARES (CONTINUED)
sales charge as currently 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.
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent 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 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 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 Salomon Smith Barney Financial Con-
sultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; (c) Class O
shares; and (d) Class A shares that were purchased without an initial sales
charge but are subject to a CDSC. A CDSC may be imposed on certain redemptions
of these shares.
36
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class L shares, Class O shares and Class A shares that are CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase. In circum-
stances 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 pur-
chase 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 Salomon Smith Barney statement month. The following table
sets forth the rates of the charge for redemptions of Class B shares by share-
holders, except in the case of Class B shares held under the Smith Barney
401(k) Program, as described below. See "Purchase of Shares--Smith Barney
401(k) and ExecChoice (TM) Programs."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 0.00%
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholders as the total num-
ber of his or her Class B shares converting at the time bears to the total num-
ber 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 divi-
37
<PAGE>
PURCHASE OF SHARES (CONTINUED)
dend and capital gain distribution reinvestments in such other funds. For Fed-
eral 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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, 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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients
or by the Transfer Agent in the case of all other shareholders) of the share-
holder's status or holdings, as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans par-
ticipating ("Participating Plans") in these Programs.
38
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L 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 the
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge 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 L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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 (TM) Program, a Par-
ticipating Plan's total Class L and Class O holdings in all non-money market
Smith Barney Mutual Funds equal at least $1,000,000, the Participating Plan
will be offered the opportunity to exchange all of its Class L shares for Class
A shares of the Fund. For Participating Plans that were originally established
through a Salomon 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 Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if a Participating
Plan's total Class L and Class O holdings in all non-money market Smith Barney
Mutual Funds equal at least $500,000 as of the calendar year-end, the Partici-
pating Plan will be offered the opportunity to exchange all of its Class L
shares and Class O shares for Class A shares of the Fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year and, unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
whether opened before or after June 21, 1996, that has not previously qualified
for
39
<PAGE>
PURCHASE OF SHARES (CONTINUED)
an exchange into Class A shares will be offered the opportunity to exchange all
of its Class L shares and Class O shares for Class A shares of a Fund, regard-
less of asset size, at the end of the eighth year after the date the Partici-
pating Plan enrolled in the Smith Barney 401(k) or ExecChoice(TM) 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 L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice (TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Salomon Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B,
Class L and Class O 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
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
40
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income 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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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.--Global 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
41
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 and Class B shares of the Fund.
** Available for exchange with Class A, Class L and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares of the Fund.
++ Available for exchange with Class B and Class L shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class L shares may exchange Fund shares for Class L 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 in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
Class O Exchanges. Class O shares may be exchanged with Class L shares of
other Smith Barney Mutual Funds. The new Class L shares will be deemed to have
been purchased on the same date as the Class O 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 impo-
sition 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. MMC may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Fund's other shareholders. In this event, the 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 sus-
pending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in
42
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
the Fund or (b) remain invested in the Fund or exchange into any of the funds
of the Smith Barney Mutual Funds ordinarily available, which position the
shareholder would be expected to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed 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 reg-
istration 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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until First Data receives further
instructions from Salomon Smith Barney, or if the shareholder's account is not
with Salomon Smith Barney, from the shareholder directly. The redemption pro-
ceeds 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certi-
fied or official bank check, will be remitted upon clearance of the check,
which may take up to ten days or more.
Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
43
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representatives or by sub-
mitting a written request for redemption to:
Smith Barney Balanced Fund
Class A, B, L, O 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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 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 invest-
or'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.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Salomon Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 con-
tact First
44
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder must
complete and return a Telephone/Wire Authorization Form, along with 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 the applicant's signature guarantee when making his or her initial invest-
ment 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
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent 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 com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (Eastern time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the
net asset value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund and
its agents will employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven days' prior notice to shareholders.
45
<PAGE>
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
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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 advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is com-
puted by dividing the net investment income per share earned by the Class dur-
ing the period by the maximum offering price per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L, Class O and Class Y shares of the Fund. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gains distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the
value of the investment at the end of the period so calculated by the initial
amount invested and subtracting 100%. The standard average annual total return,
as prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for
each Class by annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is pre-
sented. The current dividend return for each Class may vary from
46
<PAGE>
PERFORMANCE (CONTINUED)
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 com-
panies and other investment vehicles. The Fund may also include comparative
performance information in advertising or marketing its shares. Such perfor-
mance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser. MMC (through predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment advis-
er. MMC renders investment advice to investment companies that had aggregate
assets under management as of September 30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's investment objective
and policies, makes investment decisions for the Fund, places orders to pur-
chase and sell securities and employs professional portfolio managers and secu-
rities analysts who provide research services to the Fund. For investment advi-
sory services rendered to the Fund, the Fund pays MMC a fee at the annual rate
of 0.45% of the value of the Fund's average daily net assets. This fee is com-
puted daily and paid monthly.
PORTFOLIO MANAGEMENT
The equity portion of the Fund is managed by Chad Graves. Mr. Graves is a
Managing Director of Salomon Smith Barney.
The fixed-income portion of the Fund is managed by James Conroy and John
Bianchi. Both Mr. Conroy and Mr. Bianchi are Managing Directors of Salomon
Smith Barney.
47
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request without charge from a Salomon Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number listed
on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other
laws and regulations. MMC does not believe that its compliance with the
applicable law will have a material adverse effect on its ability to continue
to provide the Fund with the same level of investment advisory services that it
currently receives.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. 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"), Salomon Smith Barney is paid an annual service fee with respect
to Class A, Class B, Class L and Class O shares of the Fund at the annual rate
of 0.25% of the average daily net assets of the respective Class. Salomon Smith
Barney is also paid an annual distribution fee with respect to Class B, Class L
and Class O shares at the annual rate of 0.50%, 0.75% and 0.45%, respectively,
of the average daily net assets attributable to these Classes. Class B shares
that automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to distribution fees. The fees are
used by Salomon Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B, Class L and Class O 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 Salomon Smith
Barney Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying
48
<PAGE>
DISTRIBUTOR (CONTINUED)
charges; and indirect and overhead costs of Salomon Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B, Class L and
Class O shares, a continuing fee for servicing shareholder accounts for as long
as a shareholder remains a holder of that Class. Salomon 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 Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon 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 hav-
ing a $.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into six Classes: A, B, L, O, Y and Z.
Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not antici-
pate that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters, except mat-
ters affecting the interests of one Fund or one Class of shares.
49
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
for voting on the written request of shareholders holding at least 10% of the
Fund's outstanding shares and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
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 Salomon Smith
Barney Financial Consultants or the Fund's Transfer Agent.
50
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
SALOMON SMITH BARNEY
----------------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
BALANCED FUND
388 Greenwich Street
New York, New York 10013
FD 0229 11/98
<PAGE>
SMITH BARNEY
Balanced
Fund
Class Z Shares Only
NOVEMBER 27, 1998
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
PROSPECTUS NOVEMBER 27, 1998
Smith Barney Balanced Fund--Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Smith Barney Balanced Fund (the "Fund") (formerly known as Smith Barney
Utilities Fund) is a diversified fund that seeks current income and long-term
capital appreciation.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus are currently offered
exclusively for sale to tax-exempt employee benefit and retirement plans
("Qualified Plans") of Salomon Smith Barney Inc. ("Salomon Smith Barney") or
any of its affiliates and to certain unit investment trusts sponsored by
Salomon Smith Barney or any of its affiliates ("Salomon Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
ACRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 19
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
- -------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 21
- -------------------------------------------------
PERFORMANCE 22
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 23
- -------------------------------------------------
ADDITIONAL INFORMATION 24
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund to
buy or the Distributor to sell any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND-- AS A % OF
CLASS Z SHARES AVERAGE NET ASSETS
- ----------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
Management fees 0.65%
Other expenses 0.09%
- ----------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.74%
- ----------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED FUND--CLASS Z SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment in Class Z shares of the
Fund, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $ 8 $24 $41 $92
- ------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
and appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set out below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1998 Annual Report, which is incorporated by reference
into the Statement of Additional Information.
FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY BALANCED
FUND
YEAR ENDED JULY 31 1998(1) 1997(1) 1996 1995(2) 1994 1993(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $15.55 $14.52 $14.02 $13.28 $15.97 $14.36
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.75 0.83 0.88 0.89 0.89 0.69
Net realized and
unrealized gain (loss)
on investments 1.81 1.37 0.47 0.82 (2.21) 1.72
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 2.56 2.20 1.35 1.71 (1.32) 2.41
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.71) (0.85) (0.85) (0.87) (0.87) (0.66)
Net realized gains (0.83) (0.32) -- (0.08) (0.50) (0.14)
Capital -- -- -- (0.02) -- --
- -------------------------------------------------------------------------------
Total Distributions (1.54) (1.17) (0.85) (0.97) (1.37) (0.80)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $16.57 $15.55 $14.52 $14.02 $13.28 $15.97
- -------------------------------------------------------------------------------
TOTAL RETURN 17.08% 15.81% 9.62% 13.55% (8.78)% 17.21%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $12 $14 $15 $15 $11 $22
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.74% 0.73% 0.78% 0.81% 0.69% 0.68%+
Net investment income 4.65 5.63 5.90 6.58 5.92 6.06+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 110% 45% 58% 36% 28% 37%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
4
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income and long-
term capital appreciation. The Fund's investment objective may be changed only
with the approval of a majority of the Fund's outstanding shares. There can be
no assurance that the Fund will achieve its investment objectives.
INVESTMENT APPROACH
The Fund is managed as a balanced fund and invests in equity and debt secu-
rities. The Fund will maintain a target asset allocation of approximately 60%
of its total assets in equity securities and approximately 40% of its total
assets in fixed-income securities. The Fund has the additional flexibility to
invest a minimum of 50% and a maximum of 70% of its total assets in equity
securities and a minimum of 30% and a maximum of 50% of its total assets in
fixed-income securities. The Fund may also invest up to 25% of its total
assets in fixed-income securities rated less than investment grade by a
nationally recognized statistical rating organization ("NRSRO") such as
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"). Such securities are commonly referred to as "junk bonds."
EQUITY INVESTMENTS
With the equity portion of the Fund, Mutual Management Corp. ("MMC") (for-
merly known as Smith Barney Mutual Funds Management Inc.), seeks to achieve
its investment objective by investing in equity securities (consisting of com-
mon stocks, preferred stocks, warrants and securities convertible into common
stocks) which in the opinion of MMC, are deemed to afford attractive opportu-
nities for capital appreciation and income. The Fund may invest in securities
of companies with attractive relative valuations based on underlying assets or
earning potential, as well as the securities of companies with favorable
growth prospects. In analyzing securities for investment, MMC considers many
factors including, but not limited to, historical and future earnings and
growth potential, current market valuation, management strategy and economic
and financial factors that may affect the price of the securities. Typically,
the Fund invests in a broadly diversified portfolio across a wide range of
industries consisting of middle to large capitalization companies, though it
may on occasion invest in smaller capitalized companies when, in the opinion
of MMC, such companies offer attractive capital appreciation opportunities.
FIXED INCOME INVESTMENTS
With the fixed-income portion of the Fund, MMC seeks to achieve its invest-
ment objective by investing in a diversified portfolio of fixed-income securi-
ties that are believed to afford opportunities for income and capital appreci-
ation. Fixed-income securities the Fund will invest in include obligations of
the U.S. government, its agencies and instrumentalities, corporate securities
(including bonds, notes, and convertible issues), mortgage backed and asset-
backed securities. The
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fixed-income management strategies will be driven by the shape of the yield
curve and yield spread analysis. There are no maturity restrictions on the
fixed-income securities in which the Fund invests. Under normal market condi-
tions the weighted average portfolio maturity for the fixed-income portfolio
will be in the 5 to 15 year range.
The Fund may also invest up to 25% of its total assets in fixed-income secu-
rities rated below investment grade by any NRSRO such as Moody's and S&P. Such
securities are commonly referred to as "junk bonds." The Fund may also hold,
from time to time, securities rated Caa by Moody's or CCC by S&P or, if unrated
or rated by other NRSROs, securities of comparable quality as determined by
MMC. While this portion of the securities held by the Fund are expected to pro-
vide greater income and possibly, opportunity for greater gain than investments
in more highly rated securities, they may be subject to greater risk of loss of
income and principal and are more speculative in nature. See "Risk Factors and
Special Considerations--Low-Rated Securities."
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio securi-
ties, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing
and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below. Certain investment restrictions, including fundamen-
tal restrictions as well as restrictions that may be changed without a share-
holder vote, adopted by the Trust are described in the Statement of Additional
Information.
U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certifi-
cates of indebtedness, notes and bonds issued by the United States Treasury or
by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the
United States government to purchase the agency's obligations; still others,
such as those of the Student Loan Marketing Association, are supported only by
the credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing secu-
rities, although, as a result, the yields available from U.S. government secu-
rities are generally lower than the yields available from interest-bearing cor-
porate securities.
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Zero Coupon Bonds. 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 obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.
Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its right to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of
the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same securities at an agreed-upon price and date. The Fund typically will
invest the proceeds of a reverse repurchase agreement in money market instru-
ments or repurchase agreements maturing not later than the expiration of the
reverse repurchase agreement. This use of the proceeds is known as leverage.
The Fund will enter into a reverse repurchase agreement for leverage purposes
only when the interest income to be
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The Fund also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when the sale of
the Fund's securities is considered to be disadvantageous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by Government National Mortgage Association ("GNMA"), FNMA and Fed-
eral Home Loan Mortgage Corporation ("FHLMC"). In a forward roll transaction,
the Fund sells a mortgage security to a financial institution, such as a bank
or broker-dealer and simultaneously agrees to repurchase a similar security
from the institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with dif-
ferent 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 securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by MMC to be liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is maintained.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by MMC to be liquid and unencumbered and are
marked to market daily pursuant to guidelines
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
established by the Trustees. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. 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 certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies' obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certifi-
cates that are structured to direct payments on underlying collateral to dif-
ferent series or classes of the obligations.
To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
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 effect 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
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 secu-
rities are subject to prepayments, which may shorten the weighted average life
of such securities and may lower their return.
Lending Portfolio Securities. Consistent with applicable regulatory require-
ments, the Fund may lend its portfolio securities to brokers, dealers and other
financial organizations. The Fund's loans of securities will be collateralized
by cash, letters of credit or U.S. government securities that are maintained at
all times in an amount at least equal to the current market value of the loaned
securities. By lending its securities, the Fund seeks to generate income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as col-
lateral.
Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for securities of the same issue as the securities sold short. Short
sales of this kind are referred to as "against the box."
Options Activities. The Fund may write (that is, sell) call options ("calls")
if the calls are covered throughout the life of the option. A call is covered
if the Fund (a) owns the optioned securities, (b) maintains in a segregated
account with the Trust's custodian, PNC Bank, National Association ("PNC
Bank"), cash, U.S. government securities, equity securities or debt securities
of any grade having a value equal to or greater than the Fund's obligations
under the call, provided such securities have been determined by MMC to be liq-
uid and unencumbered pursuant to guidelines established by the Trustees ("eli-
gible segregated assets") or (c) owns an offsetting call option. The aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash or other eligible segregated assets, together
with the aggregate value of the obligations underlying put options written by
the Fund, will not exceed 50% of the Fund's net assets. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the under-
lying security at any time during the call period (usually not more than nine
months in the case of common stock or fifteen months in the case of U.S. gov-
ernment securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund forgoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase calls on securities. The Fund also may
purchase and sell stock index calls which differ from calls on individual secu-
rities in that they
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
are settled in cash based on the values of the securities in the underlying
index, rather than by delivery of the underlying securities. In writing a call
on a stock index, the Fund receives a premium and agrees that during the call
period purchasers of a call, upon exercise of the call, will receive an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call. When the Fund buys a call on a
stock index, it pays a premium and during the call period the Fund, upon exer-
cise of the call, receives an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call.
The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the obligations underlying puts written by the Fund, together with the
aggregate value of the obligations underlying calls on securities which are
written by the Fund and covered with cash, cash equivalents or U.S. government
securities, will not exceed 50% of the Fund's net assets. The Fund also may
write "straddles," which are combinations of secured puts and covered calls on
the same underlying security.
The Fund will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Fund if the premium, plus
commis-
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
sion costs, paid to purchase the call or put is less (or greater) than the pre-
mium, less commission costs, received on the sale of the call or put. A gain
also will be realized if a call or put which the Fund has written lapses unex-
ercised, because the Fund would retain the premium. See "Dividends, Distribu-
tions and Taxes" below. The Fund will purchase and sell only options which are
listed on a national securities exchange and will write options only through a
national options clearing organization.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including GNMA certificates and the characteristics and risks of
stock index options transactions.
Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona fide hedg-
ing purposes (or that the underlying commodity value of the Fund's long posi-
tions not exceed the sum of certain identified liquid investments) and (b) the
Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash or other eligible segregated assets equal to the
market value of futures contracts purchased will be maintained in a segregated
account with PNC Bank. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing corpora-
tions, guarantee performance of the contracts. Currently, there are interest
rate futures contracts based on securities such as long-term Treasury bonds,
Treasury notes, GNMA certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of the interest rate futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. government securities
and MMC anticipates a rise in long-term interest rates, the Fund could, in lieu
of disposing of its portfolio securities, enter into interest rate futures con-
tracts for the sale of similar long-term securities. If interest rates
increased and the value of the Fund's securities declined, the value of the
Fund's interest rate futures contracts would increase, thereby protecting the
Fund by preventing the net asset value from declining as much as it otherwise
would have declined. Similarly, entering into interest rate futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities
other than the underlying securities. For example, if MMC expects long-term
interest rates to decline, the Fund might enter into interest rate futures con-
tracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
that it intends to purchase, while continuing to hold higher-yielding short-
term securities or waiting for the long-term market to stabilize.
The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases puts on securities provided
they are similarly "secured." The purchase of call options on interest rate
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract, and the Fund will set aside cash and cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Options Activities" and "Dividends, Distri-
butions and Taxes."
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the contract period. When the Fund enters into a stock index futures contract,
it must make an initial deposit, known as "initial margin," as a partial guar-
antee of its performance under the contract. As the value of the stock index
fluctuates, either party to the contract is required to make additional margin
deposits, known as "variation margin," to cover any additional obligation that
it may have under the contract. The Fund may not at any time commit more than
5% of its total assets to initial margin deposits on futures contracts.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on MMC's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes withheld prior to distribution. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar. Many of the foreign securities held
by the Fund will not be registered with, nor will the issuers thereof be sub-
ject to the reporting requirements of, the SEC. Accordingly, there may be less
publicly available information about the securities and the foreign company or
government issuing them than is available about a domestic company or govern-
ment entity. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payment positions.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when MMC believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
Eurodollar or Yankee Obligations. The Fund may invest in Eurodollar and Yan-
kee obligations. Eurodollar bank obligations are dollar denominated debt obli-
gations issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee obligations are dollar denominated obliga-
tions issued in the U.S. capital markets by foreign issuers. Eurodollar (and
to a limited extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might pre-
vent dollar denominated funds from flowing across its borders. Other risks
include: adverse political and economic developments in a foreign country; the
extent and quality of government regulation of financial markets and institu-
tions; the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"). Because Rule 144A Securities are freely transferable among
qualified institutional buyers, a liquid market may exist among such buyers.
The Board of Trustees has adopted guidelines and delegated to MMC the daily
function of determining and monitoring liquidity of Rule 144A Securities. How-
ever, the Board of Trustees maintains sufficient oversight and is ultimately
responsible for the liquidity determinations. Investments in restricted secu-
rities such as Rule 144A Securities could have the effect of increasing the
level of illiquidity in the Fund to the extent that there is temporarily no
market for these securities among qualified institutional buyers.
Real Estate Investment Trusts. The Fund may invest in real estate investment
trusts ("REITs"). REITs are pooled investment vehicles that invest primarily
in either real estate or real estate related loans. The value of the REIT is
affected by changes in the value of the properties owned by the REIT or secu-
rity mortgage loans held by the REIT. REITs are dependent upon cash flow from
its investments to repay financing costs and the management skill of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate.
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations, such as those
described below:
General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain of the strategies and techniques used by the Fund depend on fore-
casts made by MMC that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates.
Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of an increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.
Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those lim- its, the Fund could be prevented from promptly liquidating unfavor-
able positions and thus be subjected to losses. Losses incurred in hedging
transactions and the
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
costs of these transactions will affect the Fund's performance. Successful use
of stock index futures by the Fund for hedging purposes is subject to the abil-
ity of MMC to correctly predict movements in the direction of the stock market.
Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That fail-
ure could have a negative impact on the Fund's operations, including the han-
dling of securities trades, pricing and account services. MMC and Salomon Smith
Barney have advised the Fund that they have been reviewing all of their com-
puter systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, MMC has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that MMC, Salomon Smith Barney or any other service provider
will be successful, or that interaction with other non-complying computer sys-
tems will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney. The
Fund may use Salomon Smith Barney in connection with a purchase or sale of
securities when MMC believes that the charge for the transaction does not
exceed usual and customary levels. The Fund also may use Salomon Smith Barney
as a commodities broker in connection with entering into futures contracts and
commodity options. Salomon Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Salomon Smith Barney to its
most favored clients for comparable trades in comparable accounts.
In selecting a broker for a transaction, including Salomon Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
MMC to supplement its own research and analysis with the views and information
of other securities firms.
18
<PAGE>
VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further informa-
tion regarding the Trust's valuation policies with respect to the Fund is con-
tained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders. Dividends and capital gain distributions
will be reinvested automatically for each shareholder's account at net asset
value in additional Class Z
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shares of the Fund, unless the shareholder is eligible for qualified distribu-
tions and instructs the Fund to pay all dividends and capital gain distribu-
tions in cash. Dividends from net investment income, if any, of the Fund will
be declared quarterly. Distributions of any net long-term capital gains earned
by the Fund will be made annually after the close of the fiscal year in which
they are earned. Distributions of short-term capital gains may be paid more
frequently with dividends from net investment income. In addition, in order to
avoid the application of a 4% nondeductible excise tax measured with respect
to certain undistributed amounts of ordinary income and capital gains, the
Fund may make an additional distribution shortly before December 31 in each
year of any undistributed ordinary income or capital gains and expects to pay
any other dividends and distributions necessary to avoid the application of
this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
or her shares. Pursuant to the requirements of the Investment Company Act of
1940, as amended (the "1940 Act") and other applicable laws, a notice will
accompany any distribution paid from sources other than net investment income.
In the event the Fund distributes amounts in excess of its net investment
income and net realized capital gains, such distributions may have the effect
of decreasing the Fund's total assets, which may increase the Fund's expense
ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. If the Fund qualifies as a regu-
lated 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 addi-
tional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless
20
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
of the length of time the investor has held his or her shares of the Fund. Gen-
erally, dividends of investment income (to the extent derived from most types
of dividends from domestic corporations) from the Fund will qualify for the
Federal dividends-received deduction for corporate shareholders. Each share-
holder of the Fund will receive a statement annually from the Trust, which will
set forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and the portion of the distributions that qualifies for the dividends-
received deduction.
Shareholders should consult their plan document or tax advisers about the
consequences associated with participating in a Qualified Plan or Smith Barney
UIT.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Salomon Smith Barney UIT. Purchases are effected
at net asset value next determined after a purchase order is received by Salo-
mon Smith Barney (the "trade date"). Payment is due to Salomon Smith Barney on
the third business day (the "settlement date") after the trade date. Investors
who make payment prior to the settlement date may designate a temporary invest-
ment (such as a money market fund of the Smith Barney Mutual Funds) for such
payment until settlement date. The Fund reserves the right to reject any pur-
chase order and to suspend the offering of shares for a period of time. There
are no minimum investment requirements for Class Z shares; however, the Fund
reserves the right to vary this policy at any time.
Purchase orders received by the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
any day that the Fund calculates its net asset value are priced according to
the net asset value determined on that day. See "Valuation of Shares." Certifi-
cates for Fund shares are issued upon request to the Trust's transfer agent.
Qualified Plans may redeem their shares on any day on which the Fund calcu-
lates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value as next determined. Shareholders acquiring Class Z shares
through a Qualified Plan or a Salomon Smith Barney UIT should consult the terms
of their respective plans for redemption provisions.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
21
<PAGE>
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in the Fund
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Fund with respect to
a Class during the period by the maximum public offering price per share on the
last day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return for Class Z shares in advertisements and/or
other types of sales literature. These figures are based on historical earnings
and are not intended to indicate future performance. Total return is computed
for a specified period of time assuming deduction of the maximum sales charge,
if any, from the initial amount invested and reinvestment of all income divi-
dends and capital gains distributions on the reinvestment dates at prices cal-
culated as stated in this Prospectus, then dividing the value of the investment
at the end of the period so calculated by the initial amount invested and sub-
tracting 100%. The standard average annual total return, as prescribed by the
SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The Fund's current dividend
return may vary from time to time depending on market conditions, the composi-
tion of its investment portfolio and operating expenses. These factors and pos-
sible differences in the methods used in calculating current dividend return
should be considered when comparing the Fund's current return to yields pub-
lished for other investment companies and other investment vehicles. The Fund
may also include comparative performance information in advertising or market-
ing the Fund's shares. Such performance information may include data from
Lipper Analytical Services, Inc. and other financial publications.
22
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
INVESTMENT ADVISER
MMC is a registered investment adviser whose principal executive offices are
located at 388 Greenwich Street, New York, New York 10013, and serves as the
Fund's investment adviser. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world. Among these businesses are Citibank, Commercial Credit,
Primerica Financial Services, Salomon Smith Barney, SSBC Asset Management,
Travelers Life & Annuity, and Travelers Property Casualty. MMC (through its
predecessor entities) has been in the investment counseling business since 1934
and is a registered investment adviser. MMC renders investment advice to
investment companies that had aggregate assets under management as of September
30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's investment objec-
tives and policies, makes investment decisions for the Fund, places orders to
purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered the Fund pays MMC a fee at the annual rate of 0.45%
of the value of the Fund's daily net assets. This fee is computed daily and
paid monthly.
PORTFOLIO MANAGEMENT
The equity portion of the Fund is managed by Chad Graves. Mr. Graves is a
Managing Director of Salomon Smith Barney.
The fixed-income portion of the Fund is managed by James Conroy and John
Bianchi. Both Mr. Conroy and Mr. Bianchi are Managing Directors of Salomon
Smith Barney.
23
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays MMC
a fee at the annual rate of 0.20% of the value of the Fund's average daily net
assets. This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their merg-
er, thereby creating a new entity called Citigroup. Citigroup is a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. MMC does not believe that its compliance with the applicable law
will have a material adverse effect on its ability to continue to provide the
Fund with the same level of investment advisory services that it currently
receives.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, serves as the
Fund's distributor.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 in the Commonwealth of Massachu-
setts and is a business entity commonly known as a "Massachusetts business
trust."
The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are cur-
rently classified into six Classes: A, B, L, O, Y and Z. Each Class of shares
represents identical pro rata interests in the Fund's investment portfolio. As
a result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges, if any, for each Class; (c) the distribution and/or
service fees, if any, borne by each Class pursuant to a plan adopted under Rule
12b-1 under the 1940 Act; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of a Class.
The Trust's Board of Trustees does not anticipate that there will be any
24
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class of the Fund will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held
of that Class. Shares of the Trust will be voted generally on a Trust-wide
basis on all matters, except matters affecting only the interests of one Fund
or one or more of the Classes of shares.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Trust also plans to con-
solidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan accounts) will receive a single Prospectus annually. Shareholders who do
not want this consolidation to apply to their accounts should contact a Salomon
Smith Barney Financial Consultant or First Data Investor Services Group, Inc.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Trust's Transfer Agent.
25
<PAGE>
SALOMON SMITH BARNEY
----------------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
BALANCED FUND
388 Greenwich Street
New York, New York 10013
FD 0791 11/98
PROSPECTUS
SMITH BARNEY
Convertible
Fund
November 27, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(Registered)
<PAGE>
- --------------------------------------------------------------------------------
Prospectus November 27, 1998
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Smith Barney Convertible Fund (the "Fund") is a diversified fund that
seeks current income and capital appreciation by investing in convertible
securities and in combinations of nonconvertible fixed-income securities and
warrants or call options that together resemble convertible securities. The Fund
is one of a number of funds, each having distinct investment objectives and
policies, making up Smith Barney Income Funds (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 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 Salomon 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.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 11
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 17
- --------------------------------------------------------------------------------
Valuation of Shares 28
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 28
- --------------------------------------------------------------------------------
Purchase of Shares 30
- --------------------------------------------------------------------------------
Exchange Privilege 38
- --------------------------------------------------------------------------------
Redemption of Shares 41
- --------------------------------------------------------------------------------
Minimum Account Size 44
- --------------------------------------------------------------------------------
Performance 44
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 45
- --------------------------------------------------------------------------------
Distributor 47
- --------------------------------------------------------------------------------
Additional Information 47
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks current income and capital appreciation by investing in
convertible securities and in combinations of nonconvertible fixed-income
securities and warrants or call options that together resemble convertible
securities ("synthetic convertible securities"). Under normal circumstances, the
Fund will invest at least 65% of its assets in convertible securities, and may
invest up to 35% of its assets in synthetic convertible securities and in equity
and debt securities that are not convertible into common stock. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class O shares (prior to
June 12, 1998 called Class C shares) are offered only to persons who held Class
C shares on June 12, 1998, and a fifth Class of shares, Class Y shares, is
offered only to investors meeting an initial investment minimum of $15,000,000.
See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares 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 --
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.75% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L 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 O Shares. Class O shares are available for purchase only by
shareholders who owned Class C shares of the Fund on June 12, 1998. Class O
shares are sold at net asset value and purchases of Class O shares will not be
subject to an initial sales charge of 1.00% of the purchase price until June 22,
2001. 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 O shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class O shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A and Class B shares. Purchases of Fund shares, which when
combined with the current holdings of Class O 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
wihtin 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. 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:
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 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
this Class. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case. Finally, Class L shares which
have a lower initial sales charge but are subject to higher distribution fees
than Class A shares, are suitable for investors who are investing or intending
to invest an amount which would receive a substantial sales charge discount and
who have a short-term or undetermined time frame.
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 L 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
L 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 will 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 offered with a sales charge held in
other Smith Barney Mutual Funds listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Purchase
of Shares."
Salomon Smith Barney Financial Consultants may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L 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 among the Classes of
shares.
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
SMITH BARNEY 401(K) AND EXECCHOICE(TM) 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available without a sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney Inc. ("Salomon Smith Barney").
(An investment dealer in the selling group and a broker that clears securities
through Salomon Smith Barney are collectively referred to as "Dealer
Representatives.") In addition, certain investors, including qualified
retirement plans and investors purchasing through Dealer Representatives, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data" or the "Transfer Agent"). See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares 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 Salomon
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 L shares and the minimum
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial services
- -- asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life
& Annuity, and Travelers Property Casualty. See "Management of the Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values, next determined. 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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium- or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging in when-issued and delayed-delivery
transactions, lending portfolio securities, entering into options on securities
and short sales "against the box." See "Investment Objective and Management
Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
Smith Barney Convertible Fund Class A Class B Class L Class O* Class Y
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 5.00% None 1.00% 1.00% None
Maximum CDSC
(as a percentage of original cost
or redemption proceeds whichever
is lower) None** 5.00% 1.00% 1.00% None
- ------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.70% 0.70% 0.70% 0.70% 0.70%
12b-1 fees*** 0.25 0.75 1.00 0.70 None
Other expenses 0.30 0.29 0.28 0.30 0.13%
- ------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.25% 1.74% 1.98% 1.70% 0.83%
====================================================================================
</TABLE>
* Class C shares were renamed Class O shares effective June 12, 1998.
** 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 L shares and Class O shares
do not have a conversion feature and, therefore, are subject to an ongoing
distribution fee. As a result, long-term shareholders of Class L shares
and Class O shares may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. (the "NASD").
8
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class A shares of the Fund purchased through the Salomon 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 Salomon 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 L, Class O and certain Class A shares, the length of time
the shares are held and whether the shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon Smith Barney
also receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of
the value of average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class L shares, Salomon Smith
Barney receives an annual 12b-1 fee of 1.00% of the value of average daily net
assets, consisting of a 0.75% distribution fee and a 0.25% service fee. For
Class O shares, Salomon Smith Barney receives an annual 12b-1 fee of 0.70% of
the value of average daily net assets of this Class, consisting of a 0.45%
distribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
9
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares", "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
Smith Barney Convertible Fund 1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A $62 $88 $115 $194
Class B 68 85 105 193
Class L 40 72 116 238
Class O 37 63 101 209
Class Y 8 26 46 103
An investor would pay the following expenses on the
same investment, assuming the same annual return
and no redemption:
Class A $62 $88 $115 $194
Class B 18 55 95 193
Class L 30 72 116 238
Class O 27 63 101 209
Class Y 8 26 46 103
======================================================================================
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the years in the four-year period ended
July 31, 1998, has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1998 Annual Report, which is incorporated
by reference into the Statement of Additional Information.
For a Class A share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31, 1998 1997 1996(1) 1995 1994 1993(2)
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $18.61 $15.66 $15.27 $14.56 $14.99 $13.82
- --------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.73 0.78 0.74 0.74 0.72 0.49
Net realized and
unrealized gain (loss)
on investments (0.39) 3.28 0.38 0.70 (0.42) 1.22
- --------------------------------------------------------------------------------------------
Total Income From
Operations 0.34 4.06 1.12 1.44 0.30 1.71
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.79) (0.75) (0.73) (0.73) (0.73) (0.51)
Net realized gains (1.26) (0.36) -- -- -- (0.03)
- --------------------------------------------------------------------------------------------
Total Distributions (2.05) (1.11) (0.73) (0.73) (0.73) (0.54)
- --------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $16.90 $18.61 $15.66 $15.27 $14.56 $14.99
- --------------------------------------------------------------------------------------------
Total Return++ 1.97% 26.94% 7.41% 10.35% 1.99% 12.63%+++
- --------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $36 $39 $35 $35 $2 $2
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.25% 1.27% 1.40% 1.40% 1.40% 1.37%+
Net investment income 4.09 4.61 4.68 5.13 4.80 4.86+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 49% 57% 59% 48% 54% 95%
============================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31, 1998 1997 1996(1) 1995 1994 1993 1992 1991 1990 1989
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.60 $15.66 $15.27 $14.56 $14.99 $13.84 $12.51 $12.21 $13.80 $13.04
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.64 0.69 0.66 0.67 0.65 0.61 0.64 0.68 0.79 0.85
Net realized and unrealized
gain (loss) on investments (0.38) 3.28 0.39 0.70 (0.42) 1.20 1.35 0.33 (1.40) 0.78
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.26 3.97 1.05 1.37 0.23 1.81 1.99 1.01 (0.61) 1.63
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.71) (0.67) (0.66) (0.66) (0.66) (0.62) (0.64) (0.68) (0.83) (0.86)
Net realized gains (1.26) (0.36) -- -- -- (0.04) -- -- (0.11) (0.01)
Capital -- -- -- -- -- -- (0.02) (0.03) (0.4) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.97) (1.03) (0.66) (0.66) (0.66) (0.66) (0.66) (0.71) (0.98) (0.87)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.89 $18.60 $15.66 $15.27 $14.56 $14.99 $13.84 $12.51 $12.21 $13.80
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return++ 1.51% 26.29% 6.91% 9.80% 1.50% 13.40% 16.25% 8.86% (4.53)% 13.09%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $36 $43 $42 $46 $85 $75 $57 $66 $97 $153
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.74% 1.77% 1.90% 1.90% 1.88% 2.00% 1.88% 1.92% 1.85% 1.74%
Net investment income 3.60 4.12 4.18 4.63 4.32 4.20 4.76 5.81 6.10 6.41
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 49% 57% 59% 48% 54% 95% 77% 26% 24% 32%
==================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
++ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
12 & 13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class L share of beneficial interest outstanding throughout each period:
Smith Barney Convertible Fund
Period Ended July 31, 1998(1)
============================================================================
Net Asset Value, Beginning of Period $17.14
- ----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.05
Net realized and unrealized loss (0.17)
- ----------------------------------------------------------------------------
Total Loss From Operations (0.12)
- ----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.12)
Net realized gains --
- ----------------------------------------------------------------------------
Total Distributions (0.12)
- ----------------------------------------------------------------------------
Net Asset Value, End of Period $16.90
- ----------------------------------------------------------------------------
Total Return (0.74)%++
- ----------------------------------------------------------------------------
Net Assets, End of Period (000s) $210
- ----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.98%+
Net investment income 2.51+
- ----------------------------------------------------------------------------
Portfolio Turnover Rate 49%
============================================================================
(1) For the period from June 15, 1998 (inception date) to July 31, 1998.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class O(1) share of beneficial interest outstanding throughout each year:
Smith Barney Convertible Fund
Year Ended July 31, 1998 1997 1996(2) 1995(3)(4)
===========================================================================
Net Asset Value, Beginning of Year $18.58 $15.64 $15.27 $14.09
- ---------------------------------------------------------------------------
Income From Operations:
Net investment income 0.63 0.67 0.67 0.50
Net realized and unrealized
gain (loss) on investments (0.37) 3.31 0.37 1.17
- ---------------------------------------------------------------------------
Total Income From Operations 0.26 3.98 1.04 1.67
- ---------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.71) (0.68) (0.67) (0.49)
Net realized gains (loss) (1.26) (0.36) -- --
- ---------------------------------------------------------------------------
Total Distributions (1.97) (1.04) (0.67) (0.49)
- ---------------------------------------------------------------------------
Net Asset Value, End of Year $16.87 $18.58 $15.64 $15.27
- ---------------------------------------------------------------------------
Total Return++ 1.53% 26.37% 6.82% 12.17%++
- ---------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,557 $1,252 $641 $83
- ---------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.70% 1.74% 1.86% 1.87%+
Net investment income 3.63 4.14 4.17 4.77+
- ---------------------------------------------------------------------------
Portfolio Turnover Rate 49% 57% 59% 48%
===========================================================================
(1) On June 12, 1998, Class C shares were renamed Class O shares.
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(4) For the period from November 7, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
++ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class Y share of beneficial interest outstanding throughout each year:
Smith Barney Convertible Fund
Year Ended July 31, 1998 1997 1996(1)(2)
========================================================================
Net Asset Value, Beginning of Year $18.66 $15.68 $16.15
- ------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.77 0.83 0.38
Net realized and unrealized gain (loss)
on investments (0.35) 3.31 (0.46)
- ------------------------------------------------------------------------
Total Income (Loss) From Operations 0.42 4.14 (0.08)
- ------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.84) (0.80) (0.39)
Net realized gains (1.26) (0.36) --
- ------------------------------------------------------------------------
Total Distributions (2.10) (1.16) (0.39)
- ------------------------------------------------------------------------
Net Asset Value, End of Year $16.98 $18.66 $15.68
- ------------------------------------------------------------------------
Total Return 2.42% 27.44% (0.56)%++
- ------------------------------------------------------------------------
Net Assets, End of Year (000s) $72,870 $29,080 $9,189
- ------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.83% 0.85% 1.00%+
Net investment income 4.49 5.04 4.98+
- ------------------------------------------------------------------------
Portfolio Turnover Rate 49% 57% 59%
========================================================================
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from February 7, 1996 (inception date) to July 31, 1996.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may be changed only with the approval of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund seeks to achieve its objective by investing in convertible
securities and "synthetic convertible securities." Under normal circumstances,
the Fund will invest at least 65% of its assets in convertible securities. The
Fund is not required to sell securities to conform to this 65% limitation and
may retain on a temporary basis securities received upon conversion of
convertible securities or upon exercise of warrants or call options that are
components of synthetic convertible securities to permit their orderly
disposition, to establish long-term holding periods for tax purposes or for
other reasons. The Fund will not invest in fixed-income securities that are
rated lower than B by Moody's Investors Services, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P"), or having an equivalent rating by any nationally
recognized statistical rating organization ("NRSRO") or, if unrated, deemed by
MMC to be comparable to securities rated lower than B. The Fund may invest up to
35% of its assets in synthetic convertible securities and in equity and debt
securities that are not convertible into common stock and, for temporary
defensive purposes when deemed appropriate by the Fund's investment adviser in
light of current market conditions, may invest in these securities without
limitation. In seeking to achieve its investment objective, the Fund may write
covered call options, lend portfolio securities and enter into short sales
"against the box." The Fund may utilize up to 10% of its assets to purchase put
options on securities for hedging purposes and may invest up to 10% of its
assets in foreign securities. Special considerations associated with the Fund
are described under "Risk Factors and Special Considerations."
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities that are maintained at all times in an amount at least equal to the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund.
Short Sales Against the Box. The Fund may make short sales of common
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
stock if, at all times when a short position is open, the Fund owns the stock or
owns preferred stocks or debt securities convertible or exchangeable, without
payment of further consideration, into the shares of common stock sold short.
Short sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with PNC Bank, National Association ("PNCBank"), the Trust's custodian.
The Fund may utilize up to 50% of its assets as collateral for short sales
against the box.
Covered Option Writing. The Fund may write (sell) call options on securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A call option embodies the right of its purchaser to
compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a call option written by the Fund has the right to purchase from
the Fund the underlying security owned by the Fund at the agreed-upon price for
a specified time period.
Upon the exercise of a call option written by the Fund, the Fund may suffer a
loss equal to the excess of the security's market value at the time of the
option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option. The Fund will write only covered
options. Accordingly, whenever the Fund writes a call option, it will continue
to own or have the present right to acquire the underlying security for as long
as it remains obligated as the writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). To effect a
closing purchase transaction, the Fund would purchase, prior to the holder's
exercise of an option that the Fund has written, an option of the same series as
that on which the Fund desires to terminate its obligation. The obligation of
the Fund under an option that it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an option as the
result of the transaction. There can be no assurance that the Fund will be able
to effect closing purchase transactions at a time when it wishes to do so. To
facilitate closing purchase transactions, however, the Fund will write options
only if a secondary market for the options exists on a domestic securities
exchange or in the over-the-counter market.
Purchasing Put and Call Options on Securities. The Fund may purchase put and
call options that are traded on a domestic securities exchange. The Fund may
utilize up to 10% of its assets to purchase put options on portfolio securities
and
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
may do so at or about the same time that it purchases the underlying security or
at a later time. By buying a put, the Fund limits the risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Fund in order to acquire the underlying securities for the Fund
at a price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Fund also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
Prior to expiration, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options that it has
purchased, or options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
Futures and Options on Futures. The Fund may enter into interest rate futures
contracts, stock index futures contracts and related options that are traded on
a domestic exchange or board of trade. These transactions will be made solely
for the purpose of hedging against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions, as the case may be. All futures and options contracts will be
entered into only when the transactions are economically appropriate for the
reduction of risks inherent in the management of the Fund.
An interest rate futures contract provides for the future sale by the one
party and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
A stock index futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally entered into.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the companies included in the indexes. An option on an
interest rate or stock index contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time prior to the expiration date of the
option.
If entering into transactions involving futures contracts and options on
futures contracts, the Fund will comply with applicable requirements of the
Commodities Futures Trading Commission (the "CFTC") which require that its
transactions in futures and options be engaged in for "bona fide hedging"
purposes or other
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
permitted purposes, provided that aggregate initial margin deposits and premiums
required to establish positions, other than those considered by the CFTC to be
"bona fide hedging," will not exceed 5% of the Fund's net asset value, after
taking into account unrealized profits and unrealized losses on any such
contracts.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities or index on the
one hand, and price movements in the securities that are the subject of the
hedge, on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time.
ADDITIONAL INVESTMENTS
Money Market Instruments. When MMC believes that market conditions warrant,
the Fund may adopt a temporary defensive posture and may invest in short-term
instruments without limitation. Short-term instruments in which the Fund may
invest include: U.S. government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or an
equivalent rating by any other 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.
U.S. Government Securities. The U.S. government securities in which the Fund
may invest include: direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities that are
supported by the right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality. Treasury Bills have maturities
of less than 1 year, Treasury Notes have maturities of 1 to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Certain U.S. government securities, such as those issued or guaranteed
by GNMA, Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"), are mortgage-related securities. U.S. government
securities generally do not involve the credit risks associated with other types
of interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of losing
all or part of the income from the agreement. MMC, 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.
Real Estate Investment Trusts. The Fund may purchase real estate investment
trusts ("REITs"). REITs are investments vehicles that invest primarily in either
real estate or real estate loans. The value of a REIT is affected by changes in
the value of the properties owned by the REIT or security mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calender days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended (the "1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers which have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
5% of the value of the Fund's total assets, the Fund will not make any
additional investments. Except for the limitations on borrowing, the investment
guidelines set forth in this paragraph may be changed at any time without
shareholder consent by vote of the Trust's Board of Trustees. A complete list of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stocks and, therefore, also will react to variations in the general
market for equity securities. A unique feature of convertible securities is that
as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
convertible preferred stock is senior to common stock of the same issuer.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotations System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risks normally involved in holding the
securities comprising the synthetic convertible security.
Medium-, Low- and Unrated Securities. The Fund may invest in medium- or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than the yield offered by
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal, including the probability of default by or bankruptcy
of the issuers of such securities. Medium-and low-rated and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held by the Fund, with a commensurate effect on the
value of the Fund's shares. Therefore, an investment in the Fund should not be
considered as a complete investment program and may not be appropriate for all
investors.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk.
Issuers of medium- and low-rated and comparable unrated securities are often
highly leveraged and may not have more traditional methods of financing
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 weathered a major economic
recession. The effect that such a recession might have on such securities is not
known. Any such recession, however, could likely disrupt severely the market for
such securities and adversely affect the value of such securities. Any such
economic downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P or an equivalent rating
by any other NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of the desirable investment and assurance of interest and
principal payments over any long period of time may be small.
In light of these risks, MMC, 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. Option writing for the Fund may be limited by position and exercise
limits established by the national securities exchanges and the National
Association
24
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
of Securities Dealers, Inc. (the "NASD") and by requirements in the Code for
qualification as a regulated investment company (see "Dividends, Distributions
and Taxes"). The Fund may write covered call options to generate current income.
In addition, the Fund may enter into options transactions as hedges to reduce
investment risk, generally by making an investment expected to move in the
opposite direction of a portfolio position. A hedge is designed to offset a loss
on a portfolio position with a gain on the hedge position; at the same time,
however, a properly correlated hedge will result in a gain on the portfolio
position being offset by a loss on the hedge position. The Fund bears the risk
that the prices of the securities being hedged will not move in the same amount
as the hedge. The Fund will engage in hedging transactions only when deemed
advisable by MMC. Successful use by the Fund of options will depend on MMC's
ability to correctly predict movements in the direction of the securities
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options only if there appears to be a liquid
secondary market for the options purchased or sold, for some options no such
secondary market may exist or the market may cease to exist.
Securities of Unseasoned Issuers. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign
25
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
securities may be subject to foreign government taxes that could reduce the
yield on such securities. Because the Fund may invest in securities denominated
or quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investment in foreign securities
also may result in higher expenses due to the cost of converting foreign
currency to U.S. dollars, the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on domestic exchanges,
and the expense of maintaining securities with foreign custodians, and the
imposition of transfer taxes or transaction charges associated with foreign
exchanges.
The Fund may also purchase American Depositary Receipts ("ADRs"); European
Depositary Receipts and Global Depositary Receipts 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 depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligation and the depositary'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.
Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock.
Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when its investment adviser
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that
26
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of their value, the
value of the Fund's net assets could be adversely affected.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.
Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent,
distributor and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that MMC, Salomon Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by MMC with broker-dealers that MMC selects, including Salomon Smith
Barney and other affiliated brokers. The Fund may utilize Salomon Smith Barney
27
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
or a Salomon Smith Barney affiliated broker in connection with a purchase or
sale of securities when MMC believes that the broker's charge for the
transactions does not exceed usual and customary levels. In selecting a broker,
including Salomon Smith Barney, for a transaction, the primary consideration is
prompt and effective execution of orders at the most favorable prices. Subject
to that primary consideration, dealers may be selected for research, statistical
or other services to enable MMC to supplement its own research and analysis with
the views and information of other securities firms.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding. Net asset value is calculated separately for Class A,
B, L, O and Y.
Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost whenever
the Trustees determine that amortized cost reflects fair value of those
instruments. Amortized cost valuation involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates or
the market value of the instrument. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gain payable to shareholders.
The Fund declares dividends from its net investment income (that is, income
other than its net realized long- and short-term capital gains) monthly and pays
dividends generally on the last Friday of the month. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually after the end of the fiscal year in which they have been earned.
28
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 of each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended ("1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing the
Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B, Class L and Class O shares of the Fund
may be lower than the per share dividends on Class A and Class Y shares
principally as a result of the distribution fee applicable with respect to Class
B, Class L and Class O 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 L,
Class O and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under the Code. Dividends
paid from net investment income and distributions of net realized short-term
capital gains are taxable to shareholders as ordinary income, regardless of how
long shareholders have held their Fund shares and whether such dividends and
distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gains, regardless of how long shareholders
have held their Fund shares and whether such distributions are received in cash
or are reinvested in additional Fund shares. Furthermore, as a general rule, a
shareholder's gain or loss on a sale or redemption of Fund shares
29
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
will be a long-term capital gain or loss if the shareholder has held the shares
for more than one year and will be a short-term capital gain or loss if the
shareholder has held the shares for one year or less. Some of the Fund's
dividends declared from net investment income may qualify for the Federal
dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. Shareholders should consult their tax advisers about the status of the
Fund's dividends and distributions for state and local tax liabilities.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
Dealers
Sales Charge as a % Sales Charge as a % Reallowance as
Amount of Investment of Transaction of Amount Invested % of Offering Price
=======================================================================================
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$ 25,000-$ 49,999 4.00 4.17 3.60
$ 50,000-$ 99,999 3.50 3.63 3.15
$100,000-$249,999 3.00 3.09 2.70
$250,000-$499,999 2.00 2.04 1.80
$500,000 and over * * *
=======================================================================================
</TABLE>
* Purchases of Class A shares 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 Salomon Smith Barney, which compensates Salomon 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, Class L and Class 0 shares is waived. See
"Deferred Sales Charge Provisions" 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. 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.
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.
Class O Shares. Until June 22, 2001, purchases of Class O shares by investors
who were holders of Class C shares of the Fund on June 12, 1998 will not be
subject to the 1.00% initial sales charge, which will apply on and after that
date.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. (Class O shares are available for purchase only by shareholders
who owned Class C shares of the Fund on June 12, 1998.) Salomon Smith Barney and
Dealer Representatives 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 the Transfer Agent are not subject to
a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for Class
A, Class B and Class L shares and the subsequent investment requirement for all
Classes in the Fund is $25. For shareholders purchasing shares of the Fund
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
for Class A, Class B and Class L shares and 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 required for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest distributions from a UIT
sponsored by Salomon Smith Barney, and Directors/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 the Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 a Dealer
Representative 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 the Fund's
agent prior to its close of business. For shares purchased through Salomon Smith
Barney or a Dealer Representative purchasing through Salomon Smith Barney,
payment for Fund shares is due on the third business day after the trade 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized 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 on a monthly or quarterly basis, as
indicated by the shareholder, to provide for 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 Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon 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 Salomon Smith Barney Financial Consultant.
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan 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 Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 that is 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 Citigroup;
(f) direct rollovers by plan participants of distribution from a 401(k) plan
offered to employees of Citigroup or its subsidiaries or a 401(k) plan enrolled
in the Smith Barney 401(k) Program (Note: subsequent investments will be subject
to the applicable sales charge); (g) purchases by separate accounts used to fund
certain unregistered variable annuity contracts; (h) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and (i) purchases by
investors participating in a Salomon Smith Barney fee-based arrangement. 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 other Smith Barney Mutual Funds that are offered
with a sales
33
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
charge as currently 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.
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. 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. The term of the Letter will commence upon the date the
Letter is signed, or at the option of the investor, up to 90 days before such
date. Please contact a Salomon Smith Barney Financial Consultant or the Transfer
Agent 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 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 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 Salomon Smith Barney Financial
Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; (c) Class O
shares; and (d) Class A shares that were purchased without an initial sales
charge but are subject to a CDSC. A CDSC may be imposed on certain redemptions
of these shares.
34
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class L shares, Class O shares and Class A shares that are CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which the CDSC is imposed on Class B shares, the amount of the
charge will depend on the number of years since the shareholder made the
purchase payment from which the amount is being redeemed. Solely for purposes of
determining the number of years since a purchase payment, all purchase payments
made during a month will be aggregated and deemed to have been made on the last
day of the preceding Salomon Smith Barney statement month. The following table
sets forth the rates of the charge for redemptions of Class B shares by
shareholders, except in the case of Class B shares held under the Smith Barney
401(k) Program, as described below. See "Purchase of Shares -- Smith Barney
401(k) and ExecChoice(TM) Programs."
Year Since Purchase
Payment Was Made CDSC
================================================================================
First 5.00%
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 shareholders 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
35
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12 per
share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 591 1/42; (e) involuntary redemptions; and (f)
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 Salomon Smith Barney
in the case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the shareholder's
status or holdings, as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) 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.
36
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
The Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class L shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class L 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 the Fund, all of its subsequent investments in the Fund must be in
the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge 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 L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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(TM) Program, a
Participating Plan's total Class L and Class O holdings in all non-money market
Smith Barney Mutual Funds equal at least $1,000,000, the Participating Plan will
be offered the opportunity to exchange all of its Class L shares for Class A
shares of the Fund. For Participating Plans that were originally established
through a Salomon 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 a
Participating Plan's total Class L and Class O 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 L shares and Class O 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.
37
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class L shares and Class O 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(TM)
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 L shares of
the Fund but instead may acquire Class A shares of the Fund. Any Class L 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(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Salomon Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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 L and
Class O 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
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.-- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
38
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income 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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global Portfolio
39
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 and Class B shares of the Fund.
** Available for exchange with Class A, Class L and Class Y shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing in
Class L shares may exchange Fund shares for Class L shares of this Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed to
have been purchased on the same date as the Class L shares of the Fund that have
been exchanged.
Class O Exchanges. Class O shares may be exchanged with Class L shares of
other Smith BarneyMutual Funds. The new Class L shares will be deemed to have
been purchased on the same date as the Class O 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. MMC may determine
40
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's 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 funds of the Smith Barney Mutual Funds listed above,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program". Exchanges
will be processed at the net asset value next determined. 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 Salomon Smith Barney, or if the shareholder's account
is not with Salomon 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the
41
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
shareholder's benefit without specific instruction and Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or by
submitting a written request for redemption to:
Smith Barney Convertible Fund
Class A, B, L, O 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 appearing on a share certificate, stock power or on a written
redemption request in excess of $10,000 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 $10,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period or the redemption proceeds are to be sent
to an address other than the address of record. Unless otherwise directed,
redemption proceeds will be mailed to an investor's address of record. 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 Salomon 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 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee that will be provided by First Data upon request.
Alternatively, an
42
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
investor may authorize telephone redemptions on the new account application with
the applicant's 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
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent 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 shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) any day on which the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are processed at the net asset
value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven days' prior notice to shareholders.
43
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Salomon 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
the 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 advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
44
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
literature. These figures are computed separately for Class A, Class B, Class L,
Class O and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser. MMC (through its predecessor entities) has been in
the investment counseling business since 1934 and is a registered investment
45
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.
Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For advisory
services rendered to the Fund, the Fund pays MMC a fee at the annual rate of
0.50% of the value of the Fund's average daily net assets. This fee is computed
daily and paid monthly.
PORTFOLIO MANAGEMENT
Robert Swab, Vice President of Salomon Smith Barney has managed the
day-to-day operations of the Fund since 1995, including making all investment
decisions.
Mr. Swab's management discussions and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 are
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank
Holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain
other laws and regulations. MMC does not believe that its compliance with the
applicable law will have a material adverse effect on its ability to continue
to provide the Fund with the same level of investment advisory services that
it currently receives.
46
<PAGE>
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. 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"), Salomon Smith Barney is paid an annual service fee with respect to
Class A, Class B, Class L and Class O shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Salomon Smith
Barney is also paid an annual distribution fee with respect to Class B Class L
and Class O shares at the annual rate of 0.50%, 0.75% and 0.45%, respectively,
of the average daily net assets attributable to those Classes. Class B shares
which automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to distribution fees. The fees are
used by Salomon Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B, Class L and Class O 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 Salomon 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 Salomon Smith Barney associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B, Class L and
Class O shares, a continuing fee for servicing shareholder accounts for as long
as a shareholder remains a holder of that Class. Salomon 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 Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon 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
47
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
"Massachusetts business trust." The Trust offers shares of beneficial interest
of separate series having a $.001 per share par value. When matters are
submitted for shareholder vote, shareholders of each Class of each Fund will
have one vote for each full share owned and a proportionate, fractional vote for
any fractional share held of that Class.
Each Class represents identical interests in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the distribution and/or service
fees borne by each Class; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of the Class B
shares. The Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose for
voting on the written request of shareholders holding at least 10% of the
Trust's outstanding shares and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.
When matters are submitted for shareholder vote, shareholders of each Class
of each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. 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.
PNC Bank, 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, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their accounts should contact their Salomon Smith
Barney Financial Consultants or First Data.
48
<PAGE>
SALOMON SMITH BARNEY
-----------------------------
A memeber of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Convertible
Fund
388 Greenwich Street
New York, New York 10013
FD1210 11/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Diversified
Strategic
Income
Fund
NOVEMBER 27, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
PROSPECTUS NOVEMBER 27, 1998
Smith Barney Diversified Strategic Income Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and real-
locating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities. The Fund is one of a number of funds, each having dis-
tinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end, management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Salomon Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- -------------------------------------------------
VALUATION OF SHARES 29
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 30
- -------------------------------------------------
PURCHASE OF SHARES 32
- -------------------------------------------------
EXCHANGE PRIVILEGE 39
- -------------------------------------------------
REDEMPTION OF SHARES 42
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 45
- -------------------------------------------------
PERFORMANCE 45
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 46
- -------------------------------------------------
DISTRIBUTOR 48
- -------------------------------------------------
ADDITIONAL INFORMATION 49
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks high current income primarily through investment in
fixed-income securities. The Fund attempts to achieve this objective by allo-
cating and reallocating its assets primarily among various types of fixed-
income securities selected by its investment adviser on the basis of an analy-
sis of economic and market conditions and the relative risks and opportunities
of those types of fixed-income securities. See "Investment Objective and Man-
agement Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$15,000,000. In addition, a fifth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Salomon Smith Barney and its affiliates. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares 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--
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual serv-
ice 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
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. This CDSC may be waived
for certain redemptions. Until June 22, 2001, purchases of Class L shares by
investors who were holders of Class C shares of the Fund on June 12, 1998 will
not be subject to the 1.00% initial sales charge. The Class L shares' distri-
bution fee may cause that Class to have higher expenses and pay lower divi-
dends than Class A and Class B shares. Purchases of Fund shares, which when
combined with current holdings of Class L 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 $15,000,000. 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 con-
sider the following factors, as well as any other relevant facts and circum-
stances:
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 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 can-
not be predicted, however, there can be no assurance that this would be the
case. Finally, Class L shares which have a lower initial sales charge but are
subject to higher distribution fees than Class A shares, are suitable for
investors who are not investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or unde-
termined time frame.
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 L 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 L shares to investors with longer-term investment outlooks.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases 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 pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in other Smith Barney Mutual Funds listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares."
Salomon Smith Barney Financial Consultants may receive different compensa-
tion for selling different Classes of shares. Investors should understand that
the purpose of the CDSC on the Class B and Class L 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(TM) 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available without a
sales charge as investment alternatives under both of these programs. See
"Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, may purchase shares directly from
the Fund through the Fund's transfer agent, First Data Investors Services
Group, Inc. (the "Transfer Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open
an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed Retirement Plan. Investors in Class Y shares may open an account for
an
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
initial investment of $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(a) of the Code, the minimum initial invest-
ment requirement for Class A, Class B and Class L shares and the minimum sub-
sequent investment requirement for all Classes is $25. The minimum investment
requirements for purchases of Fund shares through the Systematic Investment
Plan are described below. There is no minimum investment required in Class A
shares for unitholders who invest distributions from a UIT sponsored by Salo-
mon Smith Barney. See "Purchase of Shares." See "Purchases of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum 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 FUND Mutual Management Corp. (the "Manager") (formerly Smith
Barney Mutual Funds Management Inc.), serves as the Fund's investment adviser
and administrator. The Manager provides investment advisory and management
services to investment companies affiliated with Smith Barney. The Manager is
a wholly owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Citigroup businesses produce a broad range of financial services--asset man-
agement, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world. Among
these businesses are Citibank, Commercial Credit, Primerica Financial Servic-
es, Salomon Smith Barney, SSBC Asset Management, Travelers Life & Annuity, and
Travelers Property Casualty.
Smith Barney Global Capital Management Inc. ("Global Capital Management")
serves as a sub-investment adviser to the Fund. Global Capital Management is a
wholly owned subsidiary of Holdings. See "Management of the Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive 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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income 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 a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. General changes in interest
rates will result in increases or decreases in the market value of the obliga-
tions held by the Fund. The Fund may invest up to 35% of its assets in corpo-
rate fixed-income securities of domestic issuers rated by a nationally recog-
nized statistical rating organization ("NRSRO") such as securities rated Ba or
lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by Stan-
dard & Poor's Ratings Group ("S&P") or in nonrated securities deemed by the
Manager to be of comparable quality. The Fund may invest in securities which
are medium and low-rated by NRSROs. For example, the Fund may invest in fixed-
income securities rated as low as Caa by Moody's or CCC by S&P. Securities
that are rated Ba by Moody's or BB by S&P have speculative characteristics
with respect to capacity to pay interest and repay principal. Securities that
are rated B generally lack characteristics of a desirable investment and
assurance of interest and principal payments over any long period of time may
be small. Securities that are rated Caa or CCC are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest. Although medium- or low-rated securities offer a
higher current yield than the yield offered by higher rated securities, they
involve greater volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the issuers of such
securities. Medium- and low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties of major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The Fund's investing in the secu-
rities of foreign issuers involves special risks and considerations not typi-
cally associated with investing in domestic issuers. These risks include dif-
ferences in accounting, auditing and financial reporting standards, generally
higher commission rates on foreign portfolio transactions, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability that could affect domestic
investments in foreign countries and potential restrictions on the flow of
international capital. Foreign securities often trade with less frequency and
volume than domestic securities and therefore may exhibit greater price vola-
tility and changes in foreign exchange rates will affect the
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
value of those securities held by the Fund that are denominated or quoted in
currencies other than the U.S. dollar. Certain of the investments held by the
Fund and certain of the investment strategies that the Fund may employ might
expose it to certain risks. The investments presenting the Fund with risks are
mortgage-related securities, medium- or low-rated securities, as described
above, foreign securities, as described above, and securities of unseasoned
issuers. The investment strategies presenting the Fund with risks are entering
in repurchase agreements and reverse repurchase agreements, entering into for-
ward roll transactions, purchasing or selling securities on a when-issued or
delayed-delivery basis, lending portfolio securities, entering into transac-
tions involving options and futures contracts and entering into currency trans-
actions. See "Investment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred at
the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
FUND CLASS A CLASS B CLASS L* CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering price) 4.50% None 1.00% 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 0.11 0.10 0.10 0.01
- -------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.01% 1.50% 1.45% 0.66%
- -------------------------------------------------------------------------------
</TABLE>
* Class C shares were renamed Class L shares.
** 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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. (the
"NASD").
Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, 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 Salomon Smith Barney Financial Consultant.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon Smith Barney
also receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of
the value of the average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class L shares, Salomon Smith
Barney receives an annual 12b-1 fee of .70% of the value of average daily net
assets of this Class, consisting of a 0.45% distribution fee and a 0.25% serv-
ice fee. "Other expenses" in the above table include fees for shareholder serv-
ices, custodial fees, legal and accounting fees, printing costs and registra-
tion fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A.................................. $55 $76 $99 $165
Class B.................................. 60 78 92 167
Class L.................................. 35 55 88 182
Class Y.................................. 7 21 37 82
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. 55 76 99 165
Class B.................................. 15 48 82 167
Class L.................................. 25 55 88 182
Class Y.................................. 7 21 37 82
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1990 through July
31, 1994 has been audited by other independent auditors. The information set
out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1998 Annual Report, which is
incorporated by reference into the Statement of Additional Information.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND
YEAR ENDED JULY 31, 1998(1) 1997 1996 1995 1994 1993(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41 $ 8.24
- ------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3) 0.53 0.62 0.61 0.94 0.63 0.47
Net realized and
unrealized gain (loss) 0.05 0.24 0.03 (0.18) (0.52) 0.27
- ------------------------------------------------------------------------------
Total Income From
Operations 0.58 0.86 0.64 0.76 0.11 0.74
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.58) (0.67) (0.62) (0.48) (0.62) (0.45)
Net realized gains (0.05) -- -- -- (0.10) (0.12)
Capital -- -- (0.05) (0.19) (0.04) --
- ------------------------------------------------------------------------------
Total Distributions (0.63) (0.67) (0.67) (0.67) (0.76) (0.57)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41
- ------------------------------------------------------------------------------
TOTAL RETURN 7.47% 11.36% 8.39% 10.35% 1.16% 9.30%++
- ------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 397 $267 $203 $177 $ 76 $ 48
- ------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS:
Expenses(3) 1.01% 1.03% 1.04% 1.09% 1.10% 1.10%+
Interest expense 0.06 0.06 0.01 -- -- --
Net investment income 6.51 7.75 7.85 8.15 7.67% 8.26+
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 128% 85% 90% 83% 93% 116%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
(3) The investment adviser waived part of its fees for the years ended July
31,1995 and 1994. If such fees had not been waived, the per share effect
on net investment income and the ratios of expenses to average net assets
would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS
- ------------------------------------------------------------
1995 1994 1995 1994
------------------------ ----------- -----------
<S> <C> <C> <C> <C>
Class A $0.01 $0.00* 1.14% 1.12%
</TABLE>
++Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
* Amount represents less than $0.01 per share.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31, 1998 (1) 1997 1996 1995 1994 1993 1992 1991 1990(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 8.03 $ 7.83 $ 7.86 $ 7.76 $ 8.41 $ 8.55 $ 7.98 $ 8.06 $ 8.00
- -----------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (3) 0.49 0.59 0.58 0.70 0.59 0.65 0.68 0.71 0.41
Net realized and
unrealized gain (loss) 0.05 0.23 0.01 0.02 (0.51) (0.07) 0.64 0.07 0.05
- -----------------------------------------------------------------------------------------------------
Total Income From
Operations 0.54 0.82 0.59 0.72 0.08 0.58 1.32 0.78 0.46
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.54) (0.62) (0.57) (0.44) (0.60) (0.58) (0.68) (0.71) (0.40)
Net realized gains (0.05) -- -- -- (0.10) (0.14) -- (0.06) --
Capital -- -- (0.05) (0.18) (0.03) -- (0.07) (0.09) --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.62) (0.62) (0.62) (0.73) (0.72) (0.75) (0.86) (0.40)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 7.98 $ 8.03 $ 7.83 $ 7.86 $ 7.76 $ 8.41 $ 8.55 $ 7.98 $ 8.06
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 6.93% 10.89% 7.80% 10.00% 0.66% 7.28% 17.12% 10.42% 6.00%++
- -----------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $2,280 $2,440 $2,380 $2,367 $2,469 $2,105 $1,465 $ 503 $ 179
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses (3) 1.50% 1.51% 1.52% 1.56% 1.57% 1.59% 1.62% 1.63% 1.74%+
Interest expense 0.06 0.06 0.01 -- -- -- -- -- --
Net investment income 6.12 7.34 7.36 6.82 7.20 7.77 7.99 9.21 9.59+
- -----------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 128% 85% 90% 83% 93% 116% 125% 131% 56%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from December 28, 1989 (commencement of operations) to
July 31, 1990.
(3) The investment adviser waived part of its fees for the years ended July
31,1995 and 1994. If such fees had not been waived, the per share effect
on net investment income and the ratios of expenses to average net assets
would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS
- -------------------------------------------------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Class B $0.00* $0.00* 1.61% 1.59%
</TABLE>
++Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
* Amount represents less than $0.01 per share.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND
YEAR ENDED JULY 31, 1998(1)(2) 1997 1996 1995(3) 1994 1993(4)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 8.01 $ 7.81 $ 7.84 $ 7.76 $ 8.41 $ 8.36
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income
(5) 0.49 0.58 0.52 1.16 0.55 0.22
Net realized and
unrealized gain (loss) 0.06 0.24 0.07 (0.46) (0.47) 0.06
- -------------------------------------------------------------------------------
Total Income From
Operations 0.55 0.82 0.59 0.70 0.08 0.28
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.54) (0.62) (0.57) (0.44) (0.60) (0.20)
Net realized gains (0.05) -- -- -- (0.10) (0.03)
Capital -- -- (0.05) (0.18) (0.03) --
- -------------------------------------------------------------------------------
Total Distributions (0.59) (0.62) (0.62) (0.62) (0.73) (0.23)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 7.97 $ 8.01 $ 7.81 $ 7.84 $ 7.76 $ 8.41
- -------------------------------------------------------------------------------
TOTAL RETURN 7.08% 10.92% 7.82% 9.73% 0.66% 3.41%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 135 $ 84 $ 42 $ 13 $ 1 $ 11
- -------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS
Expenses (5) 1.45% 1.46% 1.47% 1.46% 1.57% 1.50%+
Interest expense 0.06 0.06 0.01 -- -- --
Net investment income 6.09 7.19 7.61 10.23 7.20 7.87+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 128% 85% 90% 83% 93% 116%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects per share data for the period.
(2) Class L shares were called Class C shares until June 12, 1998.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(4) For the period from March 19, 1993 (inception date) to July 31, 1993.
(5) The investment adviser waived part of its fees for the years ended July
31,1995 and 1994. If such fees had not been waived, the per share effect
on net investment income and the ratios of expenses to average net assets
would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS
- -------------------------------------------------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Class L $0.00* $0.00* 1.51% 1.58%
</TABLE>
++Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
* Amount represents less than $0.01 per share.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31, 1998 1997 1996(1)
- -----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 8.00 $ 7.82 $ 7.89
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.55 0.64 0.50
Net realized and unrealized gain 0.06 0.24 0.01
- -----------------------------------------------------------------
Total Income From Operations 0.61 0.88 0.51
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.60) (0.70) (0.53)
Net realized gains (0.05) -- --
Capital -- -- (0.05)
- -----------------------------------------------------------------
Total Distributions (0.65) (0.70) (0.58)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 7.96 $ 8.00 $ 7.82
- -----------------------------------------------------------------
TOTAL RETURN 7.96% 11.64% 6.65%++
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $124,559 $80,479 $26,940
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.66% 0.70% 0.69%+
Interest expense 0.06 0.06 0.01
Net investment income 6.88 7.84 8.54+
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 128% 85% 90%
- -----------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects per share data for the period.
(2) For the period from October 10, 1995 (inception date) to July 31, 1996.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is high current income primarily through
investment in fixed-income securities. In attempting to achieve its objective,
the Fund allocates and reallocates its assets primarily among various types of
fixed-income securities selected by the Manager. The types of fixed-income
securities among which the Fund's assets will be primarily allocated are:
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"); mortgage-related securities
issued by various governmental and non-governmental entities; domestic and
foreign corporate securities; and foreign government securities. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective.
The allocation and reallocation of the Fund's assets will be undertaken by
the Manager on the basis of its analysis of economic and market conditions and
the relative risks and opportunities of particular types of fixed-income secu-
rities. In general, the particular types of fixed-income securities selected
for investment by the Fund at any given time will be those that, in the view
of the Manager, offer the highest income available at the time. The Fund typi-
cally would not invest in fixed-income securities offering the highest income
potential if the Manager determined that the income potential is not suffi-
cient to justify the higher risks associated with the securities.
At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least
65% of the Fund's assets will be invested in fixed-income securities, which
for this purpose will include non-convertible preferred stocks. The Fund gen-
erally will invest in intermediate- and long-term fixed-income securities with
the result that, under normal market conditions, the weighted average maturity
of the Fund's securities is expected to be between five and 12 years. Up to
20% of the Fund's assets may be invested in common stock or other equity-
related securities, including convertible securities, preferred stock, war-
rants and rights.
Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through certifi-
cates. Under current market conditions, the Fund's holdings of mortgage-
related securities may be expected to consist primarily of securities issued
or guaranteed by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). The composition of the Fund's investments in mortgage-related
securities, however, will vary from time to time based upon the determination
of the Manager as to how best to achieve the Fund's investment objective tak-
ing 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 an equivalent rating
by any other NRSRO or, if not rated, will be of
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
equivalent investment quality as determined by the Manager. The Manager also
may consider the ratings, if any, assigned to mortgage-related securities by
NRSROs other than Moody's and S&P.
The Fund typically will purchase a corporate debt security if the Manager
believes that the yield and, to a lesser extent, the potential for capital
appreciation of the security are sufficiently attractive in light of the risks
of ownership of the security. In determining whether the Fund should invest in
particular debt securities, the Manager will consider factors such as: the
price, coupon and yield to maturity; the credit quality of the issuer; the
issuer's available cash flow and the related coverage ratios; the property, if
any, securing the obligation; and the terms of the debt securities, including
the subordination, default, sinking fund and early redemption provisions. The
Manager also will review the ratings, if any, assigned to the securities by
Moody's, S&P or other NRSROs. The Manager's judgment as to credit quality of a
debt security may differ, however, from that suggested by the ratings pub-
lished by a rating service.
The Fund may invest up to 35% of its assets in corporate fixed-income secu-
rities of domestic issuers rated an equivalent rating by NRSROs, such as Ba or
lower by Moody's or BB or lower by S&P or in nonrated securities deemed by the
Manager to be of comparable quality. The Fund may invest in fixed-income secu-
rities rated as low as Caa by Moody's or CCC by S&P or of an equivalent qual-
ity by any other NRSRO.
Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United States.
Foreign government securities in which the Fund may invest consist of fixed-
income securities issued by foreign governments. In general, the Fund may
invest in debt securities issued by foreign governments or any of their polit-
ical subdivisions that are considered stable by Global Capital Management. Up
to 5% of the Fund's assets, however, may be invested in foreign securities
issued by countries with developing economies.
The Fund may invest in fixed-income securities issued by supranational orga-
nizations, which are entities designated or supported by a government or gov-
ernmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community, the Euro-
pean Economic Community and the World Bank. These organizations have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are lim-
ited to a percentage of their total capital (including "callable capital" con-
tributed by members at an entity's call), reserves and net income.
The Fund may also invest in zero coupon securities and payment-in-kind
bonds.
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when the Manager
believes that market conditions warrant, the Fund may invest in short-term
instruments without limitation for temporary defensive purposes. Short-term
instruments in which the Fund may invest include: U.S. government securities;
certain bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of domestic or foreign banks, domestic savings and loan
associations and similar institutions); commercial paper rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from another NRSRO or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements with
respect to the securities in which the Fund may invest. The Fund will invest in
obligations of a foreign bank or foreign branch of a domestic bank only if the
Manager determines that the obligations present minimum credit risks. These
obligations may be traded in the United States or outside the United States,
but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as GNMA cer-
tificates); securities that are supported by the right of the issuer to borrow
from the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds gen-
erally have maturities of greater than 10 years at the date of issuance. Cer-
tain 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 inter-
est-bearing securities, although, as a result, the yields available from U.S.
government securities are generally lower than the yields available from inter-
est-bearing corporate securities.
Zero Coupon Securities. 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 obligations of comparable maturities which
make periodic distributions of interest. On the other hand, because there are
no periodic interest payments to be reinvested prior to maturity, zero coupon
securities eliminate reinvestment risk and lock in a rate of return to maturi-
ty.
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Real Estate Investment Trusts. The Fund may purchase real estate investment
trusts ("REITs"). REITs are investment vehicles that invest primarily in either
real estate or real estate loans. The value of a REIT is affected by changes in
the value of the properties owned by the REIT or securing mortgage loans held
by the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate.
Asset-Backed Securities. The Fund may invest in asset backed securities
("ABSs"). An ABS 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 creditworthi-
ness 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 the ABS, as will the exhaustion of any credit enhancement. The risks
of investing in ABSs ultimately will depend upon the payment of the consumer
loans by the individual borrowers. In its capacity as purchaser of the ABS, the
Fund will generally have no recourse to the entity that originated the loans in
the event of default by the borrower. In addition, the loans underlying the
ABSs are subject to prepayments, which may shorten the weighted average life of
such securities and may lower their return.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed informa-
tion concerning these strategies and their related risks is contained in the
Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions with certain member banks of the Federal Reserve System and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Fund's
holding period. The value of the underlying securities will be at least equal
at all times to the total amount of the repurchase obligation, including inter-
est. 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
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the income from the agreement. The Manager or Global Capital Management, acting
under the supervision of the Trust's Board of Trustees, reviews on an ongoing
basis the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund may enter into repurchase agreements to evaluate
potential risks.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is con-
sidered a borrowing by the Fund, involves a sale by the Fund of securities that
it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the pro-
ceeds of reverse repurchase agreements to provide liquidity to meet redemp-
tion requests when the sale of the Fund's securities is considered to be dis-
advantageous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but gener-
ally will be collateralized by different pools of mortgages with different pre-
payment 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 securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by the Manager to be liquid and unencumbered and are marked to
market daily pursuant to guidelines established by the Trustees. The Fund will
subsequently monitor the account to insure that such equivalent value is main-
tained.
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by the Manager to be liquid and unencumbered
and are marked to market daily pursuant to guidelines established by the Trust-
ees. Placing securities rather than cash in the segregated account may have a
leveraging effect on the Fund's net assets.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Loans of portfolio securities by the
Fund will be collateralized by cash, letters of credit or U.S. government secu-
rities that are maintained at all times in an amount at least equal to the cur-
rent 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 common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with its custodian.
Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. A put option embodies the right of its pur-
chaser to compel the writer of the option to purchase from the option holder an
underlying security at a specified price at any time during the option period.
In contrast, a call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
put option written by the Fund has the right to compel the Fund to purchase
from it the underlying security at the agreed-upon price for a specified time
period, while the purchaser of a call option written by the Fund has the right
to purchase from the Fund the underlying security owned by the Fund at the
agreed-upon price for a specified time period.
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Upon the exercise of a call option written by the Fund, the Fund may suffer
a loss equal to the excess of the security's market value at the time of the
option exercise over the option's exercise price, less the premium received
for writing the option.
The Fund will write (sell) only covered options. Thus, whenever the Fund
writes (sells) a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated
as the writer of the option. To support its obligation to purchase the under-
lying security if a put option is exercised, the Fund will either (a) deposit
with its custodian in a segregated account cash or other eligible assets hav-
ing a value at least equal to the exercise price of the underlying securities
or (b) continue to own an equivalent number of puts of the same "series" (that
is, puts on the same underlying security having the same exercise prices and
expiration dates as those written by the Fund), or an equivalent number of
puts of the same "class" (that is, puts on the same underlying security) with
exercise prices greater than those that it has written (or, if the exercise
prices of the puts that it holds are less than the exercise prices of those
that it has written, it will deposit the difference with its custodian in a
segregated account).
Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time. In purchasing
option securities, the Fund will trade only with counterparties of high stand-
ing in terms of credit quality and commitment to the market. Risks associated
with options transactions and foreign futures contracts are described below
under "Special Considerations."
Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect to options on such futures contracts. A futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified debt security at a specified price, date, time and
place. The Fund may enter into futures contracts to sell debt securities when
the Manager believes that the value of the Fund's debt securities will
decrease. The Fund may enter into futures contracts to purchase debt securi-
ties when the Manager anticipates purchasing the underlying debt securities on
behalf of the Fund and believes that prices will rise before the purchases
will be made. When the Fund enters into a futures contract to purchase an
underlying security, an amount of cash or other eligible segregated assets,
equal to the market value of the contract, will be deposited in a segregated
account with the Fund's custodian to collateralize the position, thereby
insuring that the use of the contract is unleveraged. The Fund will not enter
into futures contracts for speculation and will enter into futures contracts
that are traded on a domestic or foreign exchange or board of trade as well as
the over-the-counter market.
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
An option on a futures contact, as contrasted with the direct investment in a
futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
The Fund may purchase put options on futures contracts to hedge its portfolio
of debt securities against the risk of rising interest rates, and may purchase
call options on futures contracts to hedge against a decline in interest rates.
The Fund may write put and call options on futures contracts in entering into
closing sale transactions and to increase its ability to hedge against changes
in interest rates. The Fund will write put and call options on futures con-
tracts that are traded on a domestic or foreign exchange or board of trade as
well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash) basis at the rate prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in forward currency exchange and options on foreign currencies are
limited to hedging involving either specific transactions or portfolio posi-
tions.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency for an agreed-upon price at an agreed-upon date which may be any
fixed number of days from the date of the contract agreed upon by the parties.
These contracts are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Although these contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase and sell put, call and other types of options on for-
eign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is denomi-
nated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the pur-
chaser, in return for a premium, the
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
right to sell, in the case of a put, and buy, in the case of a call, the under-
lying currency at a specified price during the term of the option. Although the
purchase of an option on a foreign currency may constitute an effective hedge
by the Fund against fluctuations in the exchange rates, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign cur-
rencies purchased by the Fund may be traded on domestic and foreign exchanges
or over-the-counter.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 15% of its total assets in securities with contrac-
tual or other restrictions on resale and other instruments that are not readily
marketable, including (a) repurchase agreements with maturities greater than
seven days, (b) futures contracts and related options for which a liquid sec-
ondary market does not exist and (c) time deposits maturing in more than seven
calendar days. The above restriction does not apply to securities subject to
Rule 144A under the Securities Act of 1933, as amended (the "1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers that have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments. Immediately
after any borrowing (including reverse repurchase agreements and forward roll
transactions) by the Fund, the Fund will maintain an asset coverage of at least
300% with respect to all of its borrowings. Except for the limitations on bor-
rowing, the investment guidelines set forth in this paragraph may be changed at
any time without shareholder consent by vote of the Trust's Board of Trustees.
A complete list of investment restrictions that identifies additional restric-
tions that cannot be changed without the approval of a majority of the Fund's
outstanding shares is contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low- and Unrated Securities. The Fund may invest in medium- or low-
rated securities and unrated securities of comparable quality. Generally, these
securities offer a higher current yield than the yield offered by higher-rated
securities but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large uncertain-
ties 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,
22
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
reduce the value of securities held by the Fund with a commensurate effect on
the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these secu-
rities also tend to be more sensitive to individual corporate developments and
changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more tradi-
tional methods of financing available to them so that their ability to service
their debt obligations during an economic downturn or during sustained periods
of rising interest rates may be impaired. The risk of loss due to default by
such issuers is significantly greater because medium- and low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. In
addition, the markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which higher-
rated securities are traded. The existence of limited markets for these secu-
rities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for medium- and low-rated and comparable unrated securi-
ties is relatively new and has not fully weathered a major economic recession.
Any such recession, however, could likely disrupt severely the market for such
securities and adversely affect the value of such securities. Any such eco-
nomic downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P or an equivalent rating
by other NRSROs 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 prin-
cipal payments over any
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
long period of time may be small. Low-rated securities, for example, that are
rated Caa or CCC by Moody's or S&P, respectively are of poor standing. These
issues may be in default or may present elements of danger may exist with
respect to principal or interest.
In light of the risks described above, the Manager, in evaluating the cred-
itworthiness of an issue, whether rated or unrated, will take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue,
the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
tions in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an estab-
lished market share.
Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations that are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and eco-
nomic developments and the possible imposition of limitations on the repatria-
tion of currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic compa-
nies. The yield of the Fund may be adversely affected by fluctuations in value
of one or more foreign currencies relative to the U.S. dollar. Moreover, secu-
rities of many foreign companies and their markets may be less liquid and
their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the yield on such securities.
Because the Fund will invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
adversely affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result
in higher expenses due to the cost of converting foreign currency to U.S. dol-
lars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on domestic exchanges, the expense of
maintaining securities with foreign custodians, and the imposition of transfer
taxes or transaction charges associated with foreign exchanges.
The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or
24
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary'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.
Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign
issuers, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, and preferred stock. The Fund's investments in
each of equipment lease or equipment trust certificates will not exceed 5% of
its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest
in warrants for the acquisition of stock of the same or of a different issuer
or in corporate fixed-income securities that have conversion or exchange
rights permitting their holder to convert or exchange the securities at a
stated price within a specified period of time into a specified number of
shares of common stock. In addition, the Fund may invest in participations
that are based on revenues, sales or profits of an issuer or in common stock
offered as a unit with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. 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 certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies'
25
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
obligations. Collateralized mortgage obligations are a type of bond secured by
an underlying pool of mortgages or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series or
classes of the obligations.
To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
Securities of Developing Countries. A developing country generally is con-
sidered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing coun-
tries involves exposure to economic structures that are generally less diverse
and mature, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. Historical experience indicates that
the markets of developing countries have been more volatile than the markets
of the more mature economies of developed countries; however, such markets
often have provided higher rates of return to investors.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal securi-
ties laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when the Manager
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these secu-
rities when a ready buyer is not available at a price that the Fund deems rep-
resentative of their value, the value of the Fund's net assets could be
adversely affected.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity determi-
nations. Investments in restricted securities such as Rule 144A Securities
could have the effect of increasing the level of illiquidity in the Fund to
the extent that there is temporarily no market for these securities among
qualified institutional buyers.
Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and
26
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
selling options can result in large amounts of leverage. The leverage offered
by trading in options may cause the Fund's net asset value to be subject to
more frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an
option of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would be terminated by a closing purchase transaction, but the Fund would not
be deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face higher transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options on financial futures only if there
appears to be a liquid secondary market for the options or futures sold or pur-
chased, for some options or futures, no such secondary market may exist or the
market may cease to exist.
Futures and Options on Futures. Investments in futures and options on futures
made by the Fund will be made solely for the purpose of hedging against the
effects of changes in the value of its portfolio securities due to anticipated
changes in interest rates and when the transactions are economically appropri-
ate to the reduction of risks inherent in the management of the Fund. In enter-
ing into transactions involving futures contracts and options on futures con-
tracts, the Fund will comply with applicable requirements of the Commodities
Futures Trading Commission (the "CFTC") which require that its transactions in
futures and options be engaged in for "bona fide hedging" purposes or other
permitted purposes, provided that aggregate initial margin deposits and premi-
ums required to establish positions, other than those considered by the CFTC to
be "bona fide hedging," will not exceed 5% of
27
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will exist between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures con-
tracts may be closed out only on the exchange or board of trade on which they
were entered into, and no assurance can be given that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
Foreign Commodity Exchanges. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the CFTC and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the con-
tract. In addition, unless the Fund hedges against fluctuations in the exchange
rate between the U.S. dollar and the currencies in which trading is done on
foreign exchanges, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes.
Foreign Currency. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the cur-
rent market price.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer soft-
ware systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
The failure could have a negative impact on the Fund's operations, including
the handling of securities trades, pricing and account services. The Manager
and Salomon Smith Barney have advised the Fund that they have been reviewing
all of their computer systems and actively working on necessary changes to
their systems to prepare for the year 2000 and expect that their systems will
be compliant before that date. In addition, the Manager has been advised by the
Fund's custodian, transfer agent, distributor and accounting services agent
that they are also in the process
28
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of modifying their systems with the same goal. There can, however, be no assur-
ance that the Manager, Salomon Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney and
certain of its affiliated brokers. The Fund may use Salomon Smith Barney or a
Salomon Smith Barney affiliated broker in connection with a purchase or sale of
securities when the Manager believes that the charge for the transaction does
not exceed usual and customary levels. The Fund also may use Salomon Smith Bar-
ney as a commodities broker in connection with entering into futures contracts
and commodity options. Salomon Smith Barney has agreed to charge the Fund com-
modity commissions at rates comparable to those charged by Salomon Smith Barney
to its most favored clients for comparable trades in comparable accounts.
In selecting a broker for a transaction, including Salomon Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
the Manager to supplement its own research and analysis with the views and
information of other securities firms.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then
29
<PAGE>
VALUATION OF SHARES (CONTINUED)
the fair market value of those securities will be determined by consideration
of other factors by or under the direction of the Board of Trustees or its
delegates. A security that is traded primarily on a domestic or foreign stock
exchange is valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business
on each day. Investments in U.S. government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in
the over-the-counter market. Short-term investments that mature in 60 days or
less are valued at amortized cost whenever the Trustees determine that amor-
tized 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 direc-
tion of the Board of Trustees. Further information regarding the Trust's valu-
ation policies with respect to the Fund is contained in the Statement of Addi-
tional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. Dividends
and distributions are treated the same for tax purposes whether taken in cash
or reinvested in additional shares. The Fund declares and pays dividends
monthly, consisting of estimated daily net investment income. Any net realized
gains, after utilization of capital loss carryforwards, will be distributed at
least annually, with the distribution of dividends from net investment income,
and net realized short-term capital gains (including short-term capital gains
from options transactions, if any) may be paid more frequently.
The per share dividends on Class B and Class L shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class L shares. The per share dividends on Class A shares of the Fund may be
lower than the per
30
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 L and Class Y shares.
In addition, as determined by the Board of Trustees, distributions of the
Fund may include a return of capital. Shareholders will be notified of the
amount of any distribution that represents a return of capital. In order to
comply with a calendar year distribution requirement under the Code, it may be
necessary for the Fund to make distributions at times other than those set
forth above.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund has qualified and intends to qualify each year as a
regulated investment company under Subchapter M of the Code. If the Fund quali-
fies as a regulated investment company and meets certain distribution require-
ments, the Fund will not be subject to Federal income tax on its net investment
income and net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Dividends and distributions paid by the Fund will not qual-
ify for the Federal dividends-received deduction for corporate shareholders.
Income received by the Fund from sources within foreign countries may be sub-
ject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's sharehold-
ers.
Each shareholder of the Fund will receive a statement annually from the
Trust, which will set forth separately the aggregate dollar amount of dividends
and capital gains distributed to the shareholder by the Fund with respect to
the prior calendar year.
Shareholders should consult their tax advisers about the status of the Fund's
dividends and distributions for Federal, state and local tax liabilities.
31
<PAGE>
PURCHASE OF SHARES
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a dis-
cussion of factors to consider in selecting which Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
AMOUNT OF % OF % OF REALLOWANCE AS % OF
INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Less than--$25,000 4.50% 4.71% 4.00%
$ 25,000--$49,999 4.00 4.17 3.60
$ 50,000--$99,999 3.50 3.63 3.15
$100,000--$249,999 2.50 2.56 2.25
$250,000--$499,999 1.50 1.52 1.35
$500,000 and over * * *
- ------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares 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 Salomon 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 L shares is waived. See "Deferred Sales
Charge Provisions" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended (the "1933 Act"). 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.
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial Consul-
tant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B,
Class L or Class Y shares. Salomon Smith Barney and Dealer Representatives 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 the Transfer Agent are not subject to a maintenance
fee.
Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. 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 L shares and
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 required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a UIT sponsored by Salomon Smith
Barney, and Directors/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 the Transfer Agent. Share certificates are issued
only upon a shareholder's written request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 Dealer
Representatives 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
the Fund's agent prior to its close of business. For shares purchased through
Salomon Smith Barney or a Dealer Representative purchasing
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
through Salomon Smith Barney, payment for Fund shares is due on the third busi-
ness day after the trade 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized 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 on a monthly or quarterly basis as
indicated by the shareholder to provide for systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon Smith Barney brokerage
account or redeem the shareholder's shares of a Salomon Smith Barney money mar-
ket fund to make additions to the account. Additional information is available
from the Fund or a Salomon Smith Barney Financial Consultant.
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-shar-
ing or other benefit plan 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 Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 that is
34
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 Citigroup; (f) direct rollovers by plan participants of distri-
butions from a 401(k) plan offered to employees of Citigroup or its subsidiar-
ies or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subse-
quent investments will be subject to the applicable sales charge); (g) pur-
chases by separate accounts used to fund certain unregistered variable annuity
contracts; (h) investments of distributions from a UIT sponsored by Salomon
Smith Barney; and (i) purchases by investors participating in a Salomon Smith
Barney fee-based arrangement. In order to obtain such discounts, the purchaser
must provide sufficient information at the time of purchase to permit verifica-
tion that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of other Smith Barney Mutual Funds which are
offered with a sales charge as currently 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 infor-
mation at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to mod-
ification or discontinuance at any time with respect to all shares purchased
thereafter.
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent 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 (except purchases of
35
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 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 Salomon Smith Barney Financial Consultant or the Transfer
Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class A shares and Class L 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
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares Smith Barney 401(k) and ExecChoice(TM) Pro-
grams."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
36
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There 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 Pur-
chase 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 redemp-
tion. The amount of any CDSC will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part
37
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 Salomon Smith Barney
in the case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the shareholder's sta-
tus or holdings, as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans partic-
ipating ("Participating Plans") in the Programs.
The Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L 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 the 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 L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, 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(TM) Program, a Par-
ticipating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Salo-
mon Smith Barney retail brokerage account, the five-year period will be calcu-
lated 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.
38
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 L 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 L shares for Class A
shares of the Fund. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange
offer has been rejected in writing, the exchange will occur on or about the
last business day of the following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Pro-
grams, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity
to exchange all of its Class L shares for Class A shares of the Fund, regard-
less of asset size, at the end of the eighth year after the date the Partici-
pating Plan enrolled in the Smith Barney 401(k) or ExecChoice(TM) 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 L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regard-
ing these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the fol-
lowing funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class
A, Class B and Class L 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
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
39
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed--Income Funds
*Smith Barney Adjustable Rate Government Income Fund
+Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income 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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
40
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
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.--Global 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 and Class B shares of the Fund. In
addition, shareholders who own Class L shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class L shares
of this fund.
** Available for exchange with Class A, Class L and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares of the Fund.
++ Available for exchange with Class B and Class L shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class L shares may exchange Fund shares for Class L 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 in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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 impo-
sition of any charge.
41
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 Manager
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption 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 the Transfer Agent
receives further instructions from Salomon Smith Barney, or if the
shareholder's account is not with Salomon 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
42
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Salomon Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Salomon 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 Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representative or by sub-
mitting a written request for redemption to:
Smith Barney Diversified Strategic Income Fund
Class A, B, L 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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to the Transfer Agent together with the
redemption request. Any signature appearing on a share certificate, stock
power or a written redemption request in excess of $10,000 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 $10,000 or less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period or the redemption pro-
ceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's
address of record. The Transfer Agent may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible
43
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
to receive qualified distributions and has an account value of at least $5,000.
The withdrawal plan will be carried over on exchanges between funds or Classes
of the Fund. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. For fur-
ther information regarding the automatic cash withdrawal plan, shareholders
should contact a Salomon Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 con-
tact the Transfer Agent at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form, along
with a signature guarantee that will be provided by the Transfer Agent upon
request. Alternatively, an investor may authorize telephone redemption on the
new account application with the applicant's 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 the Transfer
Agent at 1-800-451-2010. Such requests may be made between 9:00 a.m. and
4:00 p.m. (Eastern Time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this pro-
gram.
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 predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent 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 com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling the Transfer Agent at 1-800-451-2010 between 9:00 a.m.
and
44
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
4:00 p.m. (Eastern Time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven days' prior notice to shareholders.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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 advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last
day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class L and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are not intended to indicate future performance. Total return
is computed for a speci-
45
<PAGE>
PERFORMANCE (CONTINUED)
fied 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 nonstan-
dard total return information for differing periods computed in the same man-
ner 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 calcu-
lating 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 infor-
mation in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other financial
publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, custodian and transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's investment adviser
and Administrator and sub-investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and execu-
tive officer of the Fund.
INVESTMENT ADVISER
The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. The Manager (through its predeces-
sors) has been in the investment counseling business since 1968 and is a reg-
istered investment adviser. The Manager renders investment advice to invest-
ment companies that had aggregate assets under management as of September 30,
1998 in excess of $108 billion.
46
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund's portfolio in accordance with the Fund's invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research service to the Fund. For
advisory services rendered to the Fund, the Fund pays the Manager a fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets. From
its fee, the Manager pays Global Capital Management a fee of 0.10% of the
value of the Fund's average daily net assets for its services as sub-invest-
ment adviser.
SUB-INVESTMENT ADVISER
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated August 31, 1995. Global Capital Management
has been in the investment counseling business since 1988 and renders advice
to client companies with aggregate assets under management, as of September 30
1998 in excess of $1 billion.
In its capacity as a sub-investment adviser, Global Capital Management is
responsible for, and selects, the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing Directors of Salomon
Smith Barney, have served as Vice Presidents and Investment Officers of the
Fund since it commenced operations. Along with Simon R. Hildreth, an Invest-
ment Officer of the Fund, they manage the day-to-day operations of the Fund,
including making all investment decisions.
Simon R. Hildreth, Managing Director of Salomon Smith Barney and a member of
the Investment Policy Committee of Global Capital Management, serves as an
Investment Officer of the Fund. Mr. Hildreth is responsible for managing the
day-to-day operations of the Fund's investments in foreign securities. Prior
to joining Salomon Smith Barney in 1994, Mr. Hildreth was a director of Mer-
cury Asset Management Ltd., a fund manager located in the United Kingdom.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 are included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
47
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered to the Fund, the Fund pays the Manager a fee at the annual rate of 0.20%
of the value of the Fund's average daily net assets.
On October 8, 1998 Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. The Manager does not believe that
its compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.
DISTRIBUTION
CFBDS, located at 21 Milk Street, Boston, MA 02109-5408 distributes shares of
the Fund as principal underwriter and as such conducts a continuous offering
pursuant to a "best efforts" arrangement requiring CFBDS to take and pay for
only such securities as may be sold to the public. The Fund has adopted a plan
of distribution under Rule 12b-1 under the 1940 Act (the "Plan"), pursuant to
which Salomon Smith Barney is paid a service fee with respect to Class A, Class
B and Class L shares of the Fund at the annual rate of 0.25% of the average
daily net assets of the respective Class. Salomon Smith Barney is also paid a
distribution fee with respect to Class B and Class L shares at the annual rate
of 0.50% and 0.45%, respectively, of the average daily net assets attributable
to those Classes. Class B shares which automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to
distribution fees. The fees are used by Salomon Smith Barney to pay its Finan-
cial Consultants for servicing shareholder accounts and, in the case of Class B
and Class L 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 Salomon Smith Barney Financial Consultants and other persons who
provide support services in connection with the distribution of shares; inter-
est and/or carrying charges; and indirect and overhead costs of Salomon Smith
Barney associated with the sale of Fund shares, including lease, utility, com-
munications and sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B and Class L
shares,
48
<PAGE>
DISTRIBUTION (CONTINUED)
a continuing fee for servicing shareholder accounts for as long as a share-
holder remains a holder of that Class. Salomon Smith Barney Financial Consul-
tants may receive different levels of compensation for selling different Clas-
ses of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon Smith Barney, amounts received under the
Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Trust may issue an unlimited number of shares of benefi-
cial interest, of separate series with a par value of $.001 per share. The Fund
offers shares of beneficial interest currently classified into five Classes--A,
B, L, Y and Z.
Each Class of shares represents identical interests in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class pursuant to the Plan; (d) the
expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
Normally there will be no meetings of shareholders for the purpose of elect-
ing Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
49
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn, New
York 11245, serves as custodian of the Fund's investments.
The Transfer Agent is located at Exchange Place, Boston, Massachusetts 02109.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's semi-
annual and annual reports by household. This consolidation means that a house-
hold 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 a Salomon Smith Barney Financial Con-
sultant or the Transfer Agent.
50
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
SalomonSmithBarney
-------------------------------
A Member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
388 Greenwich Street
New York, New York 10013
FD 1209 11/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares Only
NOVEMBER 27, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
PROSPECTUS NOVEMBER 27, 1998
Smith Barney Diversified Strategic Income Fund--Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and real-
locating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of Salomon
Smith Barney Inc. ("Salomon Smith Barney") or any of its affiliates ("Qualified
Plans") and to certain unit investment trusts sponsored by Salomon Smith Barney
or any of its affiliates ("Salomon Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 21
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- -------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 23
- -------------------------------------------------
PERFORMANCE 23
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 24
- -------------------------------------------------
ADDITIONAL INFORMATION 26
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Fund, based on the Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND--CLASS Z AS A % OF
SHARES AVERAGE NET ASSETS
- -----------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
Management fees* 0.65%
Other expenses 0.09
- -----------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.74%
- -----------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
FUND--CLASS Z SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) 5% annual return and
(2) redemption at the end of each time
period: $ 8 $24 $41 $92
- -------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal period ended July 31, 1993 and year
ended July 31, 1994 has been audited by other independent auditors. The infor-
mation set forth below should be read in conjunction with the financial state-
ments and related notes that also appear in the Fund's 1998 Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.
FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND--CLASS Z
SHARES
YEAR ENDED JULY 31, 1998(1) 1997 1996 1995(2) 1994 1993(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41 $ 8.24
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment
income(4) 0.55 0.65 0.64 0.84 0.68 0.51
Net realized and
unrealized gain (loss) 0.05 0.23 0.02 (0.06) (0.54) 0.25
- --------------------------------------------------------------------------------
Total Income From
Operations 0.60 0.88 0.66 0.78 0.14 0.76
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS
FROM:
Net investment income (0.60) (0.69) (0.63) (0.49) (0.65) (0.47)
Net realized gains (0.05) -- -- -- (0.10) (0.12)
Capital -- -- (0.06) (0.20) (0.04) --
- --------------------------------------------------------------------------------
Total Distributions (0.65) (0.69) (0.69) (0.69) (0.79) (0.59)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41
- --------------------------------------------------------------------------------
TOTAL RETURN 7.78% 11.69% 8.72% 10.94% 1.43% 9.47%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $21,670 $20,397 $16,270 $14,361 $11,552 $11,803
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(4) 0.74% 0.69% 0.70% 0.75% 0.75% 0.80%+
Interest expense 0.06 0.06 0.01 -- -- --
Net investment income 6.85 8.08 8.19 8.30 8.02 8.56+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 128% 85% 90% 83% 93% 116%
- --------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class C shares were renamed Class Z
shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
(4) The investment adviser waived part of its fees for the years ended July
31, 1995 and 1994. If such fees had not been waived, the per share effect
on net investment income and the expense ratios would have been as fol-
lows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------------------------------------
1995 1994 1995 1994
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
$0.00* $0.00* 0.80% 0.77%
</TABLE>
* Amount represents less than $0.01 per share.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
4
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is high current income primarily
through investment in fixed-income securities. In attempting to achieve its
objective, the Fund allocates and reallocates its assets primarily among vari-
ous types of fixed-income securities selected by Mutual Management Corp. (the
"Manager") (formerly Smith Barney Mutual Funds Management Inc.). The types of
fixed-income securities among which the Fund's assets will be primarily allo-
cated are: obligations issued or guaranteed as to principal and interest by
the United States government ("U.S. government securities"); mortgage-related
securities issued by various governmental and non-governmental entities;
domestic and foreign corporate securities; and foreign government securities.
The Fund's investment objective may be changed only with the approval of the
holders of a majority of the Fund's outstanding shares. There can be no assur-
ance that the Fund will achieve its investment objective.
The allocation and reallocation of the Fund's assets will be undertaken by
the Manager on the basis of its analysis of economic and market conditions and
the relative risks and opportunities of particular types of fixed-income secu-
rities. In general, the particular types of fixed-income securities selected
for investment by the Fund at any given time will be those that, in the view
of the Manager, offer the highest income available at the time. The Fund typi-
cally would not invest in fixed-income securities offering the highest income
potential if the Manager determined that the income potential is not suffi-
cient to justify the higher risks associated with the securities.
At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least
65% of the Fund's assets will be invested in fixed-income securities, which
for this purpose will include non-convertible preferred stocks. The Fund gen-
erally will invest in intermediate- and long-term fixed-income securities with
the result that, under normal market conditions, the weighted average maturity
of the Fund's securities is expected to be between five and 12 years. Up to
20% of the Fund's assets may be invested in common stock or other equity-
related securities, including convertible securities, preferred stock, war-
rants and rights.
Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through certifi-
cates. Under current market conditions, the Fund's holdings of mortgage-
related securities may be expected to consist primarily of securities issued
or guaranteed by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). The composition of the Fund's investments in mortgage-related
securities, however, will vary from time to time based upon the determination
of the Manager as to how best to achieve the Fund's investment objective tak-
ing into account factors such as the liquidity and yield of various mortgage-
related securities. Mortgage-related secu -
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
rities held by the Fund generally will be rated by a nationally recognized
statistical rating organization ("NRSRO"). For example, such mortgage-related
securities will be rated no lower than Aa by Moody's Investors Service, Inc.
("Moody's") or AA by Standard & Poor's Ratings Group ("S&P") or, if not rated,
will be of equivalent investment quality as determined by the Manager. The
Manager also may consider the ratings, if any, assigned to mortgage-related
securities by NRSROs other than Moody's and S&P.
The Fund typically will purchase a corporate debt security if the Manager
believes that the yield and, to a lesser extent, the potential for capital
appreciation of the security are sufficiently attractive in light of the risks
of ownership of the security. In determining whether the Fund should invest in
particular debt securities, the Manager will consider factors such as: the
price, coupon and yield to maturity; the credit quality of the issuer; the
issuer's available cash flow and the related coverage ratios; the property, if
any, securing the obligation; and the terms of the debt securities, including
the subordination, default, sinking fund and early redemption provisions. The
Manager also will review the ratings, if any, assigned to the securities by
Moody's, S&P or other NRSROs. The Manager's judgment as to credit quality of a
debt security may differ, however, from that suggested by the ratings pub-
lished by a rating service.
The Fund may invest up to 35% of its assets in corporate fixed-income secu-
rities of domestic issuers rated Ba or lower by Moody's or BB or lower by S&P
or an equivalent rating by any other NRSRO or in nonrated securities deemed by
the Manager to be of comparable quality. The Fund may invest in fixed-income
securities rated as low as Caa by Moody's or CCC by S&P or an equivalent rat-
ing by any other NRSRO.
Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United States.
Foreign government securities in which the Fund may invest consist of fixed-
income securities issued by foreign governments. In general, the Fund may
invest in debt securities issued by foreign governments or any of their polit-
ical subdivisions that are considered stable by Smith Barney Global Capital
Management Inc. ("Global Capital Management"). Up to 5% of the Fund's assets,
however, may be invested in foreign securities issued by countries with devel-
oping economies.
The Fund may invest in fixed-income securities issued by supranational orga-
nizations, which are entities designated or supported by a government or gov-
ernmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community, the Euro-
pean Economic Community and the World Bank. These organizations have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are lim-
ited to a percentage
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of their total capital (including "callable capital" contributed by members at
an entity's call), reserves and net income.
The Fund may also invest in zero coupon securities and payment-in-kind
bonds.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when the Manager
believes that market conditions warrant, the Fund may invest in short-term
instruments without limitation for temporary defensive purposes. Short-term
instruments in which the Fund may invest include: U.S. government securities;
certain bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of domestic or foreign banks, domestic savings and loan
associations and similar institutions); commercial paper rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from another NRSRO or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements with
respect to the securities in which the Fund may invest. The Fund will invest
in obligations of a foreign bank or foreign branch of a domestic bank only if
the Manager determines that the obligations present minimum credit risks.
These obligations may be traded in the United States or outside the United
States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including: securities that are
supported by the full faith and credit of the United States (such as GNMA cer-
tificates); securities that are supported by the right of the issuer to borrow
from the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than
one year, Treasury Notes have maturities of one to 10 years and Treasury Bonds
generally have maturities of greater than 10 years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by
GNMA, FNMA and FHLMC, are mortgage-related securities. U.S. government securi-
ties generally do not involve the credit risks associated with other types of
interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.
Zero Coupon Securities. 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 dis-
count, they will be subject to greater
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments
to be reinvested prior to maturity, zero coupon securities eliminate reinvest-
ment risk and lock in a rate of return to maturity.
Real Estate Investment Trusts. The Fund may purchase real estate investment
trusts ("REITs"). REITs are investment vehicles that invest primarily in
either real estate or real estate loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon cash flow from their invest-
ments to repay financing costs and the management skill of the REIT's manager.
REITs are also subject to risks generally associated with investments in real
estate.
Asset-Backed Securities. The Fund may invest in asset backed securities
("ABSs"). An ABS represents an interest in a pool of assets such as receiv-
ables 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 the ABS, as will the exhaustion of any credit enhance-
ment. The risks of investing in ABSs ultimately will depend upon the payment
of the consumer loans by the individual borrowers. In its capacity as pur-
chaser of the ABS, the Fund will generally have no resource to the entity that
originated the loans in the event of default by the borrower. In addition, the
loans underlying the ABSs are subject to prepayments, which may shorten the
weighted average life of such securities and may lower their return.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions with certain member banks of the Federal Reserve System and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase, and the
Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The value of the underlying securities will
be at least equal at all times to the total amount of the repurchase obliga-
tion, including interest. Repurchase agreements could involve cer-
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tain risks in the event of default or insolvency of the other party, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the agreement. The
Manager or Global Capital Management acting under the supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the value of the collat-
eral and the creditworthiness of those banks and dealers with which the Fund
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 con-
sidered a borrowing by the Fund, involves a sale by the Fund of securities that
it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the pro-
ceeds of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be disadvanta-
geous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but gener-
ally will be collateralized by different pools of mortgages with different pre-
payment 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 securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by the Manager to be liquid and unencumbered and are marked to
market
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is main-
tained.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery
of the securities occurs beyond the normal settlement periods, but no payment
or delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on those securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish with its custodian a segregated account con-
sisting of cash, U.S. government securities, equity securities or debt securi-
ties of any grade having a value equal to or greater than the Fund's purchase
commitments, provided such securities have been determined by the Manager to
be liquid and unencumbered and are marked to market daily pursuant to guide-
lines established by the Trustees. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to bro-
kers, dealers and other financial organizations. Loans of portfolio securities
by the Fund will be collateralized by cash, letters of credit or U.S. govern-
ment securities that are maintained at all times in an amount at least equal
to the current market value of the loaned securities. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The Fund will segregate common
stock or convertible or exchangeable preferred stock or debt securities in a
special account with its custodian.
Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting
the rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option
holder an underlying security at a specified price at any time during the
option period. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a put option written by the Fund has the right to compel the Fund
to purchase from it the underlying security at the agreed-upon price for a
specified time period, while the purchaser of a call option written by the
Fund has the right to purchase from the Fund the underlying security owned by
the Fund at the agreed-upon price for a specified time period.
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Upon the exercise of a call option written by the Fund, the Fund may suffer a
loss equal to the excess of the security's market value at the time of the
option exercise over the option's exercise price, less the premium received for
writing the option.
The Fund will write (sell) only covered options. Thus, whenever the Fund
writes (sells) a call option, it will continue to own or have the present right
to acquire the underlying security for as long as it remains obligated as the
writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Fund will either (a) deposit with
its custodian in a segregated account cash or other eligible segregated assets
having a value at least equal to the exercise price of the underlying securi-
ties or (b) continue to own an equivalent number of puts of the same "series"
(that is, puts on the same underlying security having the same exercise prices
and expiration dates as those written by the Fund), or an equivalent number of
puts of the same "class" (that is, puts on the same underlying security) with
exercise prices greater than those that it has written (or, if the exercise
prices of the puts that it holds are less than the exercise prices of those
that it has written, it will deposit the difference with its custodian in a
segregated account).
Purchasing Put and Call Options on Securities. The Fund may utilize up to 15%
of its assets to purchase options and may do so at or about the same time that
it purchases the underlying security or at a later time. In purchasing option
securities, the Fund will trade only with counterparties of high standing in
terms of credit quality and commitment to the market. Risks associated with
options transactions and foreign futures contracts are described below under
"Special Considerations."
Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect to options on such futures contracts. A futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified debt security at a specified price, date, time and place.
The Fund may enter into futures contracts to sell debt securities when the Man-
ager believes that the value of the Fund's debt securities will decrease. The
Fund may enter into futures contracts to purchase debt securities when the Man-
ager anticipates purchasing the underlying debt securities on behalf of the
Fund and believes that prices will rise before the purchases will be made. When
the Fund enters into a futures contract to purchase an underlying security, an
amount of cash or other eligible segregated asset equal to the market value of
the contract, will be deposited in a segregated account with the Fund's custo-
dian to collateralize the position, thereby insuring that the use of the con-
tract is unleveraged. The Fund will not enter into futures contracts for specu-
lation and will enter into futures contracts that are traded on a domestic or
foreign exchange or board of trade as well as the over-the-counter market.
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
An option on a futures contact, as contrasted with the direct investment in a
futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
The Fund may purchase put options on futures contracts to hedge its portfolio
of debt securities against the risk of rising interest rates, and may purchase
call options on futures contracts to hedge against a decline in interest rates.
The Fund may write put and call options on futures contracts in entering into
closing sale transactions and to increase its ability to hedge against changes
in interest rates. The Fund will write put and call options on futures con-
tracts that are traded on a domestic or foreign exchange or board of trade as
well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash) basis at the rate prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in forward currency exchange and options on foreign currencies are
limited to hedging involving either specific transactions or portfolio posi-
tions.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency for an agreed-upon price at an agreed-upon date which may be any
fixed number of days from the date of the contract agreed upon by the parties.
These contracts are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Although these contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase and sell put, call and other types of options on for-
eign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is denomi-
nated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
exchange rate of the currency in which a security that it anticipates purchas-
ing is denominated in relation to the currency in which the exercise price is
denominated. An option on a foreign currency gives the purchaser, in return for
a premium, the right to sell, in the case of a put, and buy, in the case of a
call, the underlying currency at a specified price during the term of the
option. Although the purchase of an option on a foreign currency may constitute
an effective hedge by the Fund against fluctuations in the exchange rates, in
the event of rate movements adverse to the Fund's position, the Fund may for-
feit the entire amount of the premium plus related transaction costs. Options
on foreign currencies purchased by the Fund may be traded on domestic and for-
eign exchanges or traded over-the-counter.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 15% of its total assets in securities with contrac-
tual or other restrictions on resale and other instruments that are not readily
marketable, including (a) repurchase agreements with maturities greater than
seven days, (b) futures contracts and related options for which a liquid sec-
ondary market does not exist and (c) time deposits maturing in more than seven
calendar days. The above restriction does not apply to securities subject to
Rule 144A under the Securities Act of 1933, as amended (the "1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers that have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments. Immediately
after any borrowing (including reverse repurchase agreements and forward roll
transactions) by the Fund, the Fund will maintain an asset coverage of at least
300% with respect to all of its borrowings. Except for the limitations on bor-
rowing, the investment guidelines set forth in this paragraph may be changed at
any time without shareholder consent by vote of the Trust's Board of Trustees.
A complete list of investment restrictions that identifies additional restric-
tions that cannot be changed without the approval of the majority of the Fund's
outstanding shares is contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low- and Unrated Securities. The Fund may invest in medium- or low-
rated securities and unrated securities of comparable quality. Generally, these
securities offer a higher current yield than the yield offered by higher-rated
securities but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organi-
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
zation, 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 pro-
gram and may not be appropriate for all investors.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these secu-
rities also tend to be more sensitive to individual corporate developments and
changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more tradi-
tional methods of financing available to them so that their ability to service
their debt obligations during an economic downturn or during sustained periods
of rising interest rates may be impaired. The risk of loss due to default by
such issuers is significantly greater because medium- and low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. In
addition, the markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which higher-
rated securities are traded. The existence of limited markets for these secu-
rities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for medium- and low-rated and comparable unrated securi-
ties is relatively new and has not fully weathered a major economic recession.
Any such recession, however, could likely disrupt severely the market for such
securities and adversely affect the value of such securities. Any such eco-
nomic downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, resulting in a decreased return to the Fund.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Securities that are rated Ba by Moody's or BB by S&P or an equivalent rating
by other NRSROs 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 prin-
cipal payments over any long period of time may be small. Low-rated securi-
ties, for example, that are rated Caa or CCC by Moody's or S&P, respectively
are of poor standing. These issues may be in default or may present elements
of danger may exist with respect to principal or interest.
In light of the risks described above, the Manager, in evaluating the cred-
itworthiness of an issue, whether rated or unrated, will take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue,
the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
tions in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an estab-
lished market share.
Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations that are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and eco-
nomic developments and the possible imposition of limitations on the repatria-
tion of currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic compa-
nies. The yield of the Fund may be adversely affected by fluctuations in value
of one or more foreign currencies relative to the U.S. dollar. Moreover, secu-
rities of many foreign companies and their markets may be less liquid and
their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the yield on such securities.
Because the Fund will invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
adversely affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result
in higher expenses due to the cost of converting foreign currency to U.S. dol-
lars, the payment of fixed brokerage commissions on foreign exchanges, which
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
generally are higher than commissions on domestic exchanges, the expense of
maintaining securities with foreign custodians, and the imposition of transfer
taxes or transaction charges associated with foreign exchanges.
The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
securities representing underlying shares of foreign companies. ADRs are pub-
licly 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 depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary'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.
Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign
issuers, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, and preferred stock. The Fund's investments in
each of equipment lease or equipment trust certificates will not exceed 5% of
its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest
in warrants for the acquisition of stock of the same or of a different issuer
or in corporate fixed-income securities that have conversion or exchange
rights permitting their holder to convert or exchange the securities at a
stated price within a specified period of time into a specified number of
shares of common stock. In addition, the Fund may invest in participations
that are based on revenues, sales or profits of an issuer or in common stock
offered as a unit with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than governmental and government-related pools
because no direct or indirect guarantees of payments are applicable with
respect to the former pools. Timely payment of interest and principal in these
pools, however, may be supported by various forms of private insurance or
guarantees, including individual loan, title, pool and hazard insurance. There
can be no assurance that the private insurers can meet their
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
obligations under the policies. Prompt payment of principal and interest on
GNMA mortgage pass-through certificates is backed by the full faith and credit
of the United States. FNMA guaranteed mortgage pass-through certificates and
FHLMC participation certificates are solely the obligations of those entities
but are supported by the discretionary authority of the United States govern-
ment to purchase the agencies' obligations. Collateralized mortgage obliga-
tions are a type of bond secured by an underlying pool of mortgages or mort-
gage pass-through certificates that are structured to direct payments on
underlying collateral to different series or classes of the obligations.
To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
Securities of Developing Countries. A developing country generally is con-
sidered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing coun-
tries involves exposure to economic structures that are generally less diverse
and mature, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. Historical experience indicates that
the markets of developing countries have been more volatile than the markets
of the more mature economies of developed countries; however, such markets
often have provided higher rates of return to investors.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal securi-
ties laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when the Manager
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these secu-
rities when a ready buyer is not available at a price that the Fund deems rep-
resentative of their value, the value of the Fund's net assets could be
adversely affected.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ultimately responsible for the liquidity determinations. Investments in
restricted securities such as Rule 144A Securities could have the effect of
increasing the level of illiquidity in the Fund to the extent that there is
temporarily no market for these securities among qualified institutional buy-
ers.
Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be sub-
ject to more frequent and wider fluctuation than would be the case if the Fund
did not invest in options.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an
option of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would be terminated by a closing purchase transaction, but the Fund would not
be deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face higher transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options on financial futures only if there
appears to be a liquid secondary market for the options or futures sold or pur-
chased, for some options or futures no such secondary market may exist or the
market may cease to exist.
Futures and Options on Futures. Investments in futures and options on futures
made by the Fund will be made solely for the purpose of hedging against the
effects of changes in the value of its portfolio securities due to anticipated
changes in interest rates and when the transactions are economically appropri-
ate to the reduc-
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tion of risks inherent in the management of the Fund. In entering into transac-
tions involving futures contracts and options on futures contracts, the Fund
will comply with applicable requirements of the Commodities Futures Trading
Commission (the "CFTC") which require that its transactions on futures and
options be engaged in for "bona fide hedging" purposes or other permitted pur-
poses, provided that aggregate initial margin deposits and premiums required to
establish positions, other than those considered by the CFTC to be "bona fide
hedging," will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will exist between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures con-
tracts may be closed out only on the exchange or board of trade on which they
were entered into, and no assurance can be given that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
Foreign Commodity Exchanges. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the Commodity
Futures Trading Commission and may be subject to greater risks than trading on
domestic exchanges. For example, some foreign exchanges may be principal mar-
kets so that no common clearing facility exists and a trader may look only to
the broker for performance of the contract. In addition, unless the Fund hedges
against fluctuations in the exchange rate between the U.S. dollar and the cur-
rencies in which trading is done on foreign exchanges, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
Foreign Currency. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the cur-
rent market price.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer soft-
ware systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
That failure could have a negative impact on the Fund's operations, including
the
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
handling of securities trades, pricing and account services. The Manager and
Salomon Smith Barney have advised the Fund that they have been reviewing all of
their computer systems and actively working on necessary changes to their sys-
tems to prepare for the year 2000 and expect that their systems will be compli-
ant before that date. In addition, the Manager has been advised by the Fund's
custodian, transfer agent, distributor and accounting service agent that they
are also in the process of modifying their systems with the same goal. There
can, however, be no assurance that the Manager, Salomon Smith Barney or any
other service provider will be successful, or that interaction with other non-
complying computer systems will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney. The
Fund may use Salomon Smith Barney in connection with a purchase or sale of
securities when the Manager believes that the charge for the transaction does
not exceed usual and customary levels. The Fund also may use Salomon Smith Bar-
ney as a commodities broker in connection with entering into futures contracts
and commodity options. Salomon Smith Barney has agreed to charge the Fund com-
modity commissions at rates comparable to those charged by Salomon Smith Barney
to its most favored clients for comparable trades in comparable accounts.
In selecting a broker for a transaction, including Salomon Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
the Manager to supplement its own research and analysis with the views and
information of other securities firms.
VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of Class Z shares may be higher than those of other
Classes because of the lower expenses attributable to Class Z shares.
20
<PAGE>
VALUATION OF SHARES (CONTINUED)
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the 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 fluctua-
tions after the determination of the settlement price. In such event, the
futures contract will be valued at a fair market price to be determined by or
under the direction of the Board of Trustees. Further information regarding the
Trust's valuation policies with respect to the Fund is contained in the State-
ment of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders. Dividends and distributions will be rein-
vested automatically for each shareholder's account at net asset value in addi-
tional Class Z shares of the Fund, unless the shareholder instructs the Fund to
pay dividends and distributions in cash. Dividends from net investment income,
if any, of the Fund will be declared monthly and will be paid on the last Fri-
day of the month. Distributions of any net long-term capital gains earned by
the Fund will be made annually after the close of the fiscal year in which they
are earned. Distributions of short-term capital gains may be paid more fre-
quently with dividends from net investment income.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund is subject to a 4% nondeductible excise tax measured with respect to
certain undistributed amounts of net investment income and capital gains. If it
is in the best interests of shareholders, the Fund expects to make such addi-
tional distributions shortly before December 31 in each year as may be neces-
sary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"), and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreas-
ing the Fund's total assets, which may increase the Fund's expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust-wide basis. The Fund has qualified and intends to continue to qualify
each year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. If the Fund qualifies as a regulated invest-
ment 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 gains will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund.
Income received by the Fund from sources within foreign countries may be sub-
ject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's sharehold-
ers.
Each shareholder of the Fund will receive a statement annually from the
Trust, which will set forth separately the aggregate dollar amount of dividends
and capital gains distributed to the shareholder by the Fund with respect to
the prior calendar year.
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Shareholders should consult their plan document or tax advisers about the tax
consequences associated with participating in a Qualified Plan or Salomon Smith
Barney UIT.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Salomon Smith Barney UIT. Purchases are effected
at the net asset value next determined after a purchase order is received by
Salomon Smith Barney (the "trade date"). Payment is due to Salomon Smith Barney
on the third business day (the "settlement date") after the trade date. Invest-
ors who make payment prior to the settlement date may designate a temporary
investment (such as a money market fund of the Smith Barney Mutual Funds) for
such payment until settlement date. The Fund reserves the right to reject any
purchase order and to suspend the offering of shares for a period of time.
There are no minimum investment requirements for Class Z shares; however, the
Fund reserves the right to vary this policy at any time.
Purchase orders received by the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, currently 4:00 p.m., Eastern time, on any
day that the Fund's calculates its net asset value, are priced according to the
net asset value determined on that day. See "Valuation of Shares." Certificates
for Fund shares are issued upon request to the Trust's transfer agent.
Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. Shareholders acquiring Class Z shares through a Smith
Barney Qualified Plan or a Salomon Smith Barney UIT should consult the terms of
their respective plans for redemption provisions.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about exchange options.
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30 day "yield" of its Class Z
shares. The Fund's yield refers to the income generated by an investment in the
Fund over the 30 day period identified in the advertisement, and is computed by
dividing the net investment income per share earned by the Fund with respect to
the Class dur-
23
<PAGE>
PERFORMANCE (CONTINUED)
ing the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming that the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or in other types of sales literature. These figures are based on histori-
cal 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
Class Z shares by annualizing the most recent monthly distribution and divid-
ing by the net asset value on the last day of the period for which current
dividend return is presented. The current dividend return may vary from time
to time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible differences in
the methods used in calculating current dividend return should be considered
when comparing the Fund's current return to yields published for other invest-
ment companies and other investment vehicles. The Fund may also include com-
parative performance information in advertising or marketing the Class Z
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, custodian and transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's investment adviser
and administrator and sub-investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and execu-
tive officer of the Trust.
24
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
INVESTMENT ADVISER
The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. The Manager is a wholly owned subsid-
iary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Citigroup Inc. ("Citigroup") Citigroup businesses produce
a broad range of financial services--asset management, banking and consumer
finance, credit and charge cards, insurance, investments, investment banking
and trading--and use diverse channels to make them available to consumer and
corporate customers around the world. Among these businesses are Citibank,
Commercial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC
Asset Management, Travelers Life & Annuity, and Travelers Property Casualty.
The Manager (through predecessor entities) has been in the investment counsel-
ing business since 1968 and is a registered investment adviser. The Manager
renders investment advice to investment companies that had aggregate assets
under management as of September 30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund's portfolio in accordance with the Fund's invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research service to the Fund. For
investment advisory services rendered to the Fund, the Fund pays the Manager a
fee at the annual rate of 0.45% of the value of the Fund's average daily net
assets.
From its fee, the Manager pays Global Capital Management a fee of 0.10% of
the value of the Fund's average daily net assets for its services as sub-
investment adviser.
SUB-INVESTMENT ADVISER
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-invest-
ment advisory agreement dated August 31, 1995. Global Capital Management has
been in the investment counseling business since 1988 and renders advice to
client companies with total assets under management, as of September 30, 1998,
in excess of $1 billion.
In its capacity as a sub-investment adviser, Global Capital Management is
responsible for and selects the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing Directors of Salomon
Smith Barney, have served as Vice Presidents and Investment Officers of the
Fund since it commenced operations. Along with Simon R. Hildreth, an
Investment Officer of the Fund, they manage the day-to-day operations of the
Fund, including making all investment decisions.
25
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Simon R. Hildreth, Managing Director of Salomon Smith Barney and a member of
the Investment Policy Committee of Global Capital Management serves as an
Investment Officer of the Fund. Mr. Hildreth is responsible for managing the
day-to-day operations of the Fund's investments in foreign securities. Prior to
joining Salomon Smith Barney in 1994, Mr. Hildreth was a Director of Mercury
Asset Management Ltd., a fund manager located in the United Kingdom.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 are included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered to the Fund, the Fund pays the Manager a fee at the annual rate of 0.20%
of the value of the Fund's average daily net assets.
On October 8, 1998 Travelers Group Inc. and Citicorp
consummated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 (the "BHCA"), the requirements of the Glass-
Steagall Act and certain other laws and regulations. The Manager does not
believe that its compliance with the applicable law will have a material
adverse effect on its ability to continue to provide the Fund with the same
level of investment advisory services that it currently receives.
DISTRIBUTION
CFBDS, Inc. is located at 21 Milk Street, Boston, MA 02109-5408, and serves
as the Fund's distributor.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust."
The Trust offers shares of beneficial interest of separate series having a
par value of $.001 per share. Shares of beneficial interest of the Fund are
currently classified into five Classes--A, B, L, Y and Z. Each Class represents
an identical
26
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
pro rata interest in the Fund's investment portfolio. As a result, the Classes
have the same rights, privileges and preferences, except with respect to: (a)
the designation of each Class; (b) the effect of the respective sales charges,
if any, for each Class; (c) the distribution and/or service fees, if any, borne
by each Class pursuant to a Plan adopted by the Fund pursuant to Rule 12b-1
under the 1940 Act; (d) the expenses allocable exclusively to each Class; (e)
voting rights on matters exclusively affecting a single Class; (f) the exchange
privilege of each Class; and (g) the conversion feature of the Class B shares.
The Trust's Board of Trustees does not anticipate that there will be any con-
flicts among the interests of the holders of different Classes of shares of the
Fund. The Trustees, on an ongoing basis, will consider whether any such con-
flict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
Normally there will be no meetings of shareholders for the purpose of elect-
ing Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. In addition, the Trust also plans to consolidate
the mailing of the Fund's Prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact a Salomon
Smith Barney Financial Consultant or the Fund's transfer agent, First Data
Investor Services Group, Inc. ("First Data").
The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn,
New York 11245, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's transfer agent.
Shareholders may seek information regarding the Fund from their Salomon Smith
Barney Financial Consultants.
27
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney, Inc.
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
388 Greenwich Street
New York, New York 10013
FD 01216 11/98
<PAGE>
SMITH BARNEY
Exchange
Reserve
Fund
NOVEMBER 27, 1998
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
PROSPECTUS NOVEMBER 27, 1998
Smith Barney Exchange Reserve Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of capi-
tal and the maintenance of liquidity by investing in a diversified portfolio of
high quality money market instruments.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end management investment company commonly referred to as a
mutual fund. Shares of other funds offered by the Trust are described in sepa-
rate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Salomon Smith Barney Financial Con-
sultant.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including distribution fees and expenses, which prospective invest-
ors will find helpful in making an investment decision. Investors are encour-
aged to read this Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 27, 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 your Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 7
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 9
- -------------------------------------------------
VALUATION OF SHARES 14
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 14
- -------------------------------------------------
PURCHASE OF SHARES 15
- -------------------------------------------------
EXCHANGE PRIVILEGE 19
- -------------------------------------------------
REDEMPTION OF SHARES 21
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 24
- -------------------------------------------------
YIELD INFORMATION 24
- -------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST 24
- -------------------------------------------------
DISTRIBUTION 26
- -------------------------------------------------
ADDITIONAL INFORMATION 26
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks to maximize current income to the extent consistent with
the preservation of capital and the maintenance of liquidity by investing in
high quality short-term money market instruments. See "Investment Objective
and Management Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public
only through the exchange of Class B or Class L shares of other Smith Barney
Mutual Funds. Class B or Class L shares of the Fund acquired through exchange
are subject to the contingent deferred sales charge ("CDSC"), if any, of the
shares with which the exchange is made. All Class B and Class L shares are
subject to an annual distribution fee of 0.50% of the value of average daily
net assets of the Fund. Eight years after the date of their original purchase,
Class B shares will be automatically redeemed at net asset value and the
redemption proceeds will be reinvested, at net asset value, in Class A shares
of Smith Barney Money Funds Inc.--Cash Portfolio ("Cash Portfolio"). Upon this
conversion, the shares will no longer be subject to the annual distribution
fee.
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney Inc. ("Salomon Smith Bar-
ney"). (An investment dealer in the selling group and a broker that clears
securities through Salomon Smith Barney are collectively referred to as
"Dealer Representatives"). In addition, certain investors, including qualified
retirement plans and investors purchasing through certain Dealer Representa-
tives, may purchase shares directly from the Fund through the Fund's transfer
agent, First Data Investors Services Group, Inc. (the "Transfer Agent"). See
"Purchase of Shares."
SMITH BARNEY 401(K) AND EXECCHOICE(TM) 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. See "Purchase of Shares--Smith Barney 401(k) and
ExecChoice(TM) Programs."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
INVESTMENT MINIMUMS Investors may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an individual retirement
account ("IRA") or a Self-Employed Retirement Plan. Subsequent investments of
at least $50 may be made for both Classes. For participants in retirement plans
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment requirement is $25. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Redemption of Shares."
MANAGEMENT OF THE FUND Mutual Management Corp. (the "Manager") serves as the
Fund's investment adviser and administrator. The Manager is a wholly owned sub-
sidiary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of Citigroup Inc. ("Citigroup"). Citigroup businesses
produce a broad range of financial services--asset management, banking and con-
sumer finance, credit and charge cards, insurance, investments, investment
banking and trading--and use diverse channels to make them available to con-
sumer and corporate customers around the world. Among these businesses are
Citibank, Commercial Credit, Primerica Financial Services, Salomon Smith Bar-
ney, SSBC Asset Management, Travelers Life & Annuity, and Travelers Property
Casualty. See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of other funds of the Smith Barney Mutual Funds at the respective net
asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Fund will be reinvested automatically in additional shares at current net asset
value unless otherwise specified by an investor. Shares acquired by dividend
and distribution reinvestment will not be subject to any CDSC. Class B shares
acquired through dividend and distribution reinvestments will become eligible
for conversion to Class A shares of the Cash Portfolio. See "Dividends, Distri-
butions and Taxes."
SPECIAL CONSIDERATIONS AND RISK FACTORS There is no assurance that the Fund
will achieve its investment objective. In light of the fees and CDSC imposed on
Class B and Class L shares, an investment in the Fund should be viewed as part
of a long-term investment in the Smith Barney Mutual Funds. Investors seeking
only to invest in a money market fund and who do not expect to re-exchange Fund
shares for Class B shares of other Smith Barney Mutual Funds should consider
more suitable investments, including other money market funds offered to the
pub -
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
lic by Salomon Smith Barney. See "Investment Objective and Management Poli-
cies" and "Purchase of Shares."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur, either directly or indirectly, as a shareholder
of the Fund, based on the maximum CDSC that may be incurred at the time of
redemption and the Fund's operating expenses for its most recent year:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND CLASS B CLASS L
- -----------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC (as a percentage of original cost or
redemption
proceeds, whichever is lower) 4.50%* None*
- -----------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management fees 0.50% 0.50%
12b-1 fee** 0.50 0.50
Other expenses 0.21 0.21
- -----------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.21% 1.21%
- -----------------------------------------------------------------------
</TABLE>
* Class B or Class L shares of the Fund acquired through exchanges with
shares of other Smith Barney Mutual Funds are subject to the CDSC, if any,
of the shares with which the exchange is made, which may be more or less
than 4.50%, in the case of Class B shares or may be 1.00%, in the case of
Class L shares depending on the date such shares were purchased. Class B
shares acquired by plans participating in the Smith Barney 401(k) Program
are subject to a CDSC of 3.00%. See "Purchase of Shares--Smith Barney
401(k) and ExecChoice(TM) Programs."
** Upon conversion, Class B shares will no longer be subject to a distribution
fee. Class L shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee. As a result, long-term shareholders
of Class L shares may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (the "NASD").
Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quar-
terly, 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 Salomon Smith Barney Financial Consultant.
The CDSC set forth in the above table is the maximum CDSC imposed by the
Fund on Class B shares purchased by certain qualified and non-qualified
retirement plans. See "Purchase of Shares--Deferred Sales Charge." Investors
may pay actual charges of less than 4.50% depending on the CDSC of the shares
exchanged for shares of the Fund or for plans participating in the Smith Bar-
ney 401(k) and ExecChoice(TM) Programs. See "Purchase of Shares--Smith Barney
401(k) and ExecChoice(TM) Programs." Salomon Smith Barney receives an annual
12b-1 distribution fee of .50% of the Fund's average daily net assets. "Other
expenses" in the above table include fees for shareholder services, custodial
fees, legal and accounting fees, printing costs and registration fees.
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the above table. See "Purchase of Shares" and "Management of the
Fund and the Trust."
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumes complete redemption at maximum
applicable CDSC at end of each time period
Class B.................................. $57 $68 $76 $147
Class L.................................. 12 38 66 147
Assumes no redemption
Class B.................................. $12 $38 $66 $147
Class L.................................. 12 38 66 147
- ------------------------------------------------------------------------------
</TABLE>
* Ten year figures assume exchange of Class B shares for Class A shares of
Smith Barney Money Funds, Inc.--Cash Portfolio at the end of the eighth year
following the date of original purchase of such Class B shares. Accordingly,
the expenses reflected above utilize the expenses of a Class A share of the
Cash Portfolio.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period
ended July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1998. The following information for the fiscal years ended July 31, 1989
through July 31, 1994 has been audited by other independent auditors. This
information should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1998 Annual Report, which is
incorporated by reference into the Statement of Additional Information.
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------
Net investment income 0.044 0.043 0.044 0.044 0.022 0.021
Dividends from net
investment income (0.044) (0.043) (0.044) (0.044) (0.022) (0.021)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------
TOTAL RETURN++ 4.51% 4.43% 4.53% 4.49% 2.18% 2.15%
- -----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 74 $ 117 $ 150 $ 160 $ 252 $ 166
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.21% 1.16% 1.17% 1.24% 1.26% 1.25%
Net investment income 4.43 4.34 4.45 4.35 2.24 2.16
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31, 1992 1991 1990 1989
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------
Net investment income 0.040 0.062 0.074 0.0802
Dividends from net investment income (0.040) (0.062) (0.074) (0.0802)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------
TOTAL RETURN++ 4.06% 6.36% 7.62% 8.32%
- --------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $ 225 $ 427 $ 687 $ 830
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.22% 1.17% 1.15% 1.22%
Net investment income 4.13 6.27 7.42 8.36
- --------------------------------------------------------------------------
</TABLE>
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31, 1998(1) 1997 1996 1995(2)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
Net investment income 0.044 0.043 0.044 0.035
Dividends from net investment income (0.044) (0.043) (0.044) (0.035)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN 4.52% 4.42% 4.51% 3.52%++
- ----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S) $ 9,315 $ 5,808 $ 9,445 $ 2,850
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.21% 1.16% 1.17% 1.21%+
Net investment income 4.43 4.34 4.39 4.76+
- ----------------------------------------------------------------------------
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the period from November 7, 1994 (inception date) to July 31, 1995.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing in short-
term money market instruments, including: securities issued or guaranteed by
the United States government, its agencies and instrumentalities ("U.S. govern-
ment securities"); repurchase agreements with respect to the foregoing; bank
time deposits, certificates of deposit and bankers' acceptances; and high grade
commercial paper. The following is a brief description of the kinds of instru-
ments in which the Fund may invest:
U.S. Government Securities in which the Fund may invest include: direct obli-
gations of the United States Treasury such as Treasury Bills, Treasury Notes
and Treasury Bonds; obligations which are supported by the full faith and
credit of the United States such as Government National Mortgage Association
pass-through certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as securities of Federal
Home Loan Banks; and obligations which are supported by the credit of the
instrumentality, such as Federal National Mortgage Association and Federal Home
Loan Mortgage Association bonds. Because the United States government is not
obligated by law to provide support for an instrumentality that it sponsors,
the Fund will invest in obligations issued by such an instrumentality only when
the Fund's investment adviser determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
Certificates of Deposit, Time Deposits and Bankers' Acceptances in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, including branches of such banks, savings and loan associa-
tions and other banking institutions having total assets in excess of $1 bil-
lion. Certificates of deposit ("CDs") are short-term negotiable obligations of
commercial banks; time deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates;
and bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The Fund may invest in
U.S. dollar-denominated bank obligations, such as CDs, bankers' acceptances and
TDs, including instruments issued or supported by the credit of domestic or
foreign banks or savings institutions having total assets at the time of pur-
chase in excess of $1 billion. The Fund generally will invest at least 25% of
its assets in these securities. The Fund will invest in an obligation of a for-
eign bank or foreign branch of a domestic bank only if the Fund's investment
adviser deems the obligation to present minimal credit risks. Nevertheless,
this kind of obligation entails risks that are different from those
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of investments in domestic obligations of domestic banks due to differences in
political, regulatory and economic systems and conditions. The Fund will not
purchase TDs maturing in more than six months and will limit to no more than
10% of its assets its investment in TDs maturing from two business days
through six months.
Commercial Paper in which the Fund may invest is limited to debt obligations
of domestic and foreign issuers that at the time of purchase are Eligible
Securities (as defined below under "Fund Quality and Diversification") that
are (a) rated by at least one nationally recognized statistical rating organi-
zation ("NRSRO") in the highest rating category for short-term debt securities
or (b) comparable unrated securities. The Fund also may invest in variable
rate master demand notes, which are unsecured demand notes typically purchased
directly from large corporate issuers providing for variable amounts of prin-
cipal indebtedness and periodic adjustments in the interest rate according to
the terms of the instrument. Demand notes normally are not traded in a second-
ary market. However, the Fund may demand payment of principal and accrued
interest in full at any time without penalty. In addition, while demand notes
generally are not rated, their issuers must satisfy the same criteria as those
set forth above for issuers of commercial paper. The Manager will consider the
earning power, cash flow and other liquidity ratios of issuers of demand notes
and continually will monitor their financial ability to meet payment on
demand.
CERTAIN INVESTMENT POLICIES
Price and Portfolio Maturity. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining maturities
of thirteen months or less at the date of purchase by the Fund. For this pur-
pose, variable rate master demand notes (as described above under "Commercial
Paper"), which are payable on demand or, under certain conditions, at speci-
fied periodic intervals not exceeding thirteen months, in either case on not
more than 30 days' notice, will be deemed to have remaining maturities of
thirteen months or less. The Fund maintains a dollar-weighted average portfo-
lio maturity of 90 days or less. The Fund follows these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance
that it can do so on a continuing basis.
Fund Quality and Diversification. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal
credit risks and which are "Eligible Securities" at the time of acquisition by
the Fund. The term Eligible Securities includes securities rated by the "Req-
uisite NRSROs" in one of the two highest short-term rating categories, securi-
ties of issuers that have received such ratings with respect to other short-
term debt securities and comparable unrated securities. "Requisite NRSROs"
means (a) any two NRSROs that have issued a rating with respect to a security
or class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO
has issued such a rating at the time that the Fund
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
acquires the security. If the Fund acquires securities that are unrated or
that have been rated by a single NRSRO, the acquisition must be approved or
ratified by the Trust's Board of Trustees. The NRSROs currently designated as
such by the SEC are Standard & Poor's Ratings Group, Moody's Investors Serv-
ice, Inc., Thomson BankWatch, Fitch IBCA, Inc. and Duff & Phelps Credit Rating
Co. A discussion of the ratings categories of the NRSROs is contained in the
Appendix to the Statement of Additional Information.
The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In addi-
tion, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any
one issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the secu-
rities are rated by the Requisite NRSROs in the highest short-term rating cat-
egory, are securities of issuers that have received such rating with respect
to other short-term debt securities or are comparable unrated securities, and
(b) the Fund does not make more than one such investment at any one time.
Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund would
acquire a U.S. government security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The Fund will enter into repurchase agree-
ments with banks which are the issuers of instruments acceptable for purchase
by the Fund and certain dealers on the Federal Reserve Bank of New York's list
of reporting dealers. Under each repurchase agreement the selling institution
will be required to maintain the value of the securities subject to the repur-
chase agreement at not less than their repurchase price. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. The Fund's investment adviser or administrator, acting under
the supervision of the Trust's Board of Trustees, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those banks and deal-
ers with which the Fund enters into repurchase agreements to evaluate poten-
tial risks.
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Mortgage- and Asset-Backed Securities. The Fund may purchase fixed or adjust-
able rate mortgage-backed securities issued by the Government National Mortgage
Association, Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation. In addition, the Fund may purchase other asset-backed
securities, including securities backed by automobile loans, equipment leases
or credit card receivables. These securities directly or indirectly represent a
participation in, or are secured by and payable from, fixed or adjustable rate
mortgage or other loans which may be secured by real estate or other assets.
Unlike traditional debt instruments, payments on these securities include both
interest and a partial payment of principal. Prepayments of the principal of
underlying loans may shorten the effective maturities of these securities and
may result in the Fund having to reinvest proceeds at a lower interest rate.
CERTAIN INVESTMENT GUIDELINES
The Fund will concentrate its investments in the banking industry except dur-
ing temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not
acquire more than 10% of the voting or any other class of securities of any one
issuer, except that U.S. government securities may be purchased without regard
to these limits. In addition, the Fund may invest up to an aggregate of 10% of
its total assets in illiquid securities with contractual or other restrictions
on resale (excluding (i) securities subject to Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act") provided at least two dealers make a mar-
ket in such securities and (ii) certain privately issued commercial paper eli-
gible for resale to institutional investors without registration pursuant to
Section 4(2) of the 1933 Act) and other instruments which are not readily mar-
ketable, including: (a) repurchase agreements providing for settlement in more
than seven days after notice by the Fund and (b) TDs maturing from two business
days through six months. The Fund also is authorized to borrow in an amount of
up to 10% of its total assets for temporary or emergency purposes, but not for
leverage, and to pledge its assets to the same extent in connection with such
borrowings. Whenever borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. A more detailed
description of these policies, together with an enumeration of additional
investment restrictions which the Fund has adopted and which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in the Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
to changes in the prevailing interest rates. Investors also should recognize
that, in periods of declining interest rates, the Fund's yield will tend to be
somewhat higher than prevailing market rates and, in periods of rising interest
rates, the Fund's yield will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the Fund from the continuous
sale of its shares will likely be invested in instruments producing lower
yields than the balance of its portfolio, thereby reducing the Fund's current
yield. In periods of rising interest rates, the opposite can be expected to
occur. In addition, securities in which the Fund will invest may not yield as
high a level of current income as might be achieved by investing in securities
with less liquidity and safety and longer maturities.
Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates, revalu-
ation of currencies, future political and economic developments and the possi-
ble imposition of currency exchange blockages or other foreign governmental
laws or restrictions and reduced availability of public information. Foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements applica-
ble to domestic issuers. In addition, there may be less publicly available
information about a foreign bank than about a domestic bank.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the Fund's operations,
including the handling of securities trades, pricing and account services. The
Manager and Salomon Smith Barney have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Manager has been
advised by the Fund's custodian, transfer agent, distributor and accounting
service agent that they are also in the process of modifying their systems with
the same goal. There can, however, be no assurance that the Manager, Salomon
Smith Barney or any other service provider will be successful, or that
interaction with other non-complying computer systems will not impair Fund
services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as
widespread or as affecting trading markets.
13
<PAGE>
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to each Class by the total number of shares of the
Class outstanding. The Fund employs the amortized cost method of valuing port-
folio securities and intends to use its best efforts to continue to maintain a
constant net asset value of $1.00 per share.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
The Fund declares dividends daily consisting of substantially all of its net
investment income, and pays dividends monthly. Any net realized gains will be
distributed at least annually. If a shareholder does not otherwise instruct,
dividends and capital gains will be reinvested automatically in additional
shares of the same Class at net asset value subject to no CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Trust-wide basis.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. In any taxable year in
which the Fund so qualifies and distributes at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and the excess of any net short-term capital gains over net long-term capital
losses), the Fund (but not its shareholders) generally will be relieved of
federal income tax on the investment company taxable income and net realized
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, distributed to shareholders. In order to qualify as a
regulated investment company, the Fund will be required to meet various Code
requirements.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gain dividends are taxable to shareholders as long-term
capital gain regardless of the length of time a shareholder may have held
shares of the Fund.
14
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends (including capital gain dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date
in such a month will be deemed to have been received by shareholders on Decem-
ber 31 of that calendar year, provided that the dividend is actually paid by
the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gain dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from obligations of the United States government
and certain of its agencies and instrumentalities may be exempt from all state
and local income taxes. Shareholders should consult their tax advisers for spe-
cific information on the tax consequences of particular types of distributions.
PURCHASE OF SHARES
Fund shares may be acquired only through exchanges with Class B and Class L
shares of other Smith Barney Mutual Funds, except that Class L shares may be
acquired directly by participants in the Smith Barney 401(k) Program or the
Smith Barney ExecChoice(TM) Program ("Participating Plans") and Class B shares
may be acquired directly by certain qualified and non-qualified retirement pro-
grams (collectively with Participating Plans, "Benefit Plans"). Investors pur-
chasing shares of the Fund through a Benefit Plan may do so directly through
the Transfer Agent. Class B shares or Class L shares acquired through exchange
are subject to the CDSC, if any, of the shares with which the exchange is made.
Class B shares acquired directly by a Benefit Plan other than a Participating
Plan will be subject to the CDSC as set forth below.
In light of the distribution fee imposed on Class B shares and Class L
shares, an investment in the Fund should be viewed as part of a long-term
investment in the Smith Barney Mutual Funds. Investors seeking only to invest
in a money market fund and who do not expect to exchange Fund shares for shares
of other funds of the Smith Barney Mutual Funds should consider more suitable
investments, including other money market funds offered by Salomon Smith Bar-
ney.
15
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing in
the Fund, among other things, investors should consider that certain other
funds with an investment objective and policies similar to those of the Fund do
not pay distribution expenses or impose any sales charge.
Purchase orders received by the Fund or a Salomon Smith Barney Financial Con-
sultant prior to the close of regular trading on the NYSE on any day the Fund
calculates its net asset value are priced according to the net asset value
determined on that day. Orders received by Dealer Representatives 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 the Fund's agent prior to its
close of business (the "trade date"). Payment for Fund shares is due on the
third business day after the trade date.
DEFERRED SALES CHARGE
Class B shares sold directly to Benefit Plans other than a Participating Plan
will be assessed a CDSC on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption. Such
shares that are redeemed will not be subject to a CDSC to the extent that the
value of such shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; and (c) shares
redeemed more than five years after their purchase. The amount of the CDSC will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for the purpose of determining
the number of years since a purchase payment, all purchase payments made during
a month will be aggregated and deemed to have been made on the last day of the
preceding Smith Barney statement month. The following table sets forth the
rates of the charge for redemptions of Class B shares by Benefit Plans other
than Participating Plans.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 0.00%
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares of Cash Portfolio
eight years after the date on which they were purchased and will thereafter no
longer be subject to any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares owned by the shareholder
as the total
16
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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.
The length of time that Class B or Class L shares subject to a CDSC have been
held will be calculated from the date that the shares were initially acquired
in the Fund or one of the other Smith Barney Mutual Funds, and Fund shares
being redeemed will be considered to represent, as applicable, capital appreci-
ation or dividend and capital gain distribution reinvestments in such other
funds. For Federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Salomon Smith Barney.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than 1.00% per 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 Salomon Smith Barney
in case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the shareholder's sta-
tus or holdings, as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all Participat-
ing Plans in these programs. Participating Plans may acquire shares of the Fund
only through an exchange from shares of another fund in the Smith Barney Mutual
Funds or through direct investment only if they hold Class L shares of another
of the Smith Barney Mutual Funds.
The Fund offers to Participating Plans Class L shares as an investment choice
under the Smith Barney 401(k) and ExecChoice(TM) Programs. Class C shares
acquired through the Participating Plans are subject to the same service and/or
dis -
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
tribution fees as the Class L shares acquired by other investors; however, they
are not subject to any initial sales charge or CDSC.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, 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(TM) Program, a Par-
ticipating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Cash Portfolio. For Participating Plans that were originally established
through a Salomon 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 anniversary date. If the Participating Plan does
not qualify for the five-year exchange to Class A shares, a review of the Par-
ticipating Plan's holdings will be performed each quarter until either the Par-
ticipating 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 Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if a Participating
Plan's 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 L shares for Class
A shares of the Cash Portfolio. 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(TM) Programs,
whether opened before or after June 21, 1996, 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 the Cash Portfolio, 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(TM) 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 L shares of the Fund but instead may
acquire Class A shares of the Cash Portfolio. Any Class L 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(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
these Programs, investors should contact a Salomon Smith Barney Financial Con-
sultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged 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 are subject to minimum investment requirements and other requirements
of the fund into which exchanges are made and a sales charge differential may
apply.
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Social Awareness Fund
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California Municipals Fund
19
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
**Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Municipal High Income 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
Global--International Funds
Smith Barney Hansberger Global Small Value Fund
Smith Barney Hansberger Global Value Fund
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.--Global 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
- --------------------------------------------------------------------------------
* Available for exchange with Class B and Class L shares of the Fund. In
addition, shareholders who own Class L shares of the Fund in a Smith Barney
401(k) Program may exchange those shares for Class L shares of this fund.
** Available for exchange with Class L shares of the Fund.
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a CDSC higher
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed to
have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
20
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. 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 reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon 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 a day on which the NYSE is
closed or as permitted under the 1940 Act in extraordinary circumstances. Gen-
erally, if the redemption proceeds are remitted to a Salomon Smith Barney
brokerage account, these funds will not be invested for the shareholder's ben-
efit without specific instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption proceeds for shares pur-
chased by check, other than a certified or official bank check, will be remit-
ted upon clearance of the check, which may take up to ten days or more.
21
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representative or by submit-
ting a written request for redemption to:
Smith Barney Exchange Reserve Fund
Class B or Class L (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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the Transfer Agent together with the redemption
request. Any signature appearing on a share certificate, stock power or a writ-
ten redemption request in excess of $10,000, 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. Writ-
ten redemption requests of $10,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any 10-day period or
the redemption proceeds are to be sent to an address other than the address of
record. Unless otherwise directed, redemption proceeds will be mailed to an
investor's address of record. The Transfer Agent may require additional sup-
porting documents for redemptions made by corporations, executors, administra-
tors, trustees or guardians. A redemption request will not be deemed properly
received until the Transfer Agent receives all required documents in proper
form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. For fur-
ther information regarding the automatic cash withdrawal plan, shareholders
should contact a Salomon Smith Barney Financial Consultant.
22
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 con-
tact the Transfer Agent at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form,
along with a signature guarantee that will be provided by the Transfer Agent
upon request. Alternatively, an investor may authorize telephone redemptions
on the new account application with the applicant's 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 the Transfer
Agent at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (Eastern time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent 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 shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling the Transfer Agent at 1-800-451-2010 between 9:00 a.m.
and 4:00 p.m. (Eastern time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account num-
23
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
ber 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.
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
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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
involuntary liquidation.
YIELD INFORMATION
From time to time, the Fund may advertise its yield and effective yield of
Class B and Class L shares. These yield figures are based on historical earn-
ings and are not intended to indicate future performance. The yield of a Class
refers to the net investment income generated by an investment in the Class
over a specific seven-day period (which will be stated in the advertisement).
This net investment income is then annualized. The effective yield is calcu-
lated similarly but, when annualized, the income earned by an investment in the
Class is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of the assumed reinvestment.
MANAGEMENT OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all signif-
icant agreements between the Trust and the companies that furnish services to
the Fund, including agreements with its investment adviser, administrator, cus-
todian and transfer agent. The day-to-day operations of the Fund are delegated
to its investment adviser and administrator. The Statement of Additional Infor-
mation contains general background information regarding each Trustee and exec-
utive officer of the Fund.
24
<PAGE>
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
INVESTMENT ADVISER
The Manager is located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's investment adviser pursuant to an advisory agreement dated
August 31, 1995. The Manager (through its predecessors) has been in the invest-
ment counseling business since 1968 and is a registered investment adviser. The
Manager renders investment advice to investment companies that had aggregate
assets under management as of September 30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment services rendered, the Fund pays the Manager a fee at the
annual rate of 0.30% of the Fund's average daily net assets.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of 0.20% of the
Fund's average daily net assets.
On October 8, 1998 Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. The Manager does not believe that
its compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.
PORTFOLIO MANAGEMENT
Phyllis M. Zahorodny, Managing Director of Salomon Smith Barney and Invest-
ment Officer of the Fund, is responsible for managing the day-to-day operations
of the Fund including making all investment decisions.
Ms. Zahorodny's management discussion and analysis, and additional perfor-
mance information regarding the Fund during the fiscal year ended July 31, 1998
are included in the Annual Report dated July 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Salomon Smith
Barney Financial Consultant or by writing or calling the Fund at the address or
phone number listed on page one of this Prospectus.
25
<PAGE>
DISTRIBUTION
CFBDS is located at 21 Milk Street, Boston, MA 02109-5048. CFBDS distributes
shares of the Fund as a principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS to take and
pay for only such securities as may be sold to the public. The Fund has adopted
a plan of distribution adopted by the Fund under Rule 12b-1 under the Act (the
"Plan"), pursuant to which Salomon Smith Barney is paid a distribution fee with
respect to Class B and Class L shares of the Fund at the annual rate of 0.50%
of the average daily net assets of each respective Class' shares. Class B
shares that automatically convert to Class A shares of the Cash Portfolio eight
years after the date of original purchase will no longer be subject to distri-
bution fees. The fees are used by Salomon Smith Barney to pay its Financial
Consultants to cover expenses primarily intended to result in the sale of
shares. These expenses include: advertising expenses; the cost of printing and
mailing prospectuses to potential investors; payments to and expenses of Salo-
mon Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carry-
ing charges; and indirect and overhead costs of Salomon Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred by Salomon Smith Barney, and such payments may exceed distri-
bution expenses actually incurred by Salomon Smith Barney. The Board of Trust-
ees evaluates the appropriateness of the Plan and its payment terms on a con-
tinuing basis and in doing so considers all relevant factors, including
expenses borne by Salomon Smith Barney and amounts received under the Plan and
the proceeds of CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. When matters are submitted for shareholder
vote, shareholders of each fund of the Trust will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held.
Shares of the Trust will be voted generally on a Trust-wide basis on all mat-
ters except matters affecting the interests of one Fund or one Class of shares.
The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares and the Fund will assist shareholders in
calling such a meeting as required by the 1940 Act.
26
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Fund's investments.
The Transfer Agent is located at Exchange Place, Boston, Massachusetts
02109.
The Fund sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Trust. In an effort to reduce the Fund's printing and mailing costs,
the Fund plans to consolidate the mailing of its semi-annual and annual
reports by household. This consolidation means that a household having multi-
ple accounts with the identical address of record will receive a single copy
of each report. Any shareholder who does not want this consolidation to apply
to his or her account should contact his or her Financial Consultant or the
Trust's Transfer Agent.
27
<PAGE>
[This page intentionally left blank]
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
EXCHANGE
RESERVE
FUND
388 Greenwich Street
New York, New York 10013
FD 1208 11/98
<PAGE>
PROSPECTUS NOVEMBER 27, 1998
Smith Barney
Exchange Reserve Fund
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30099-0062
(800) 544-5445
Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of capi-
tal and the maintenance of liquidity by investing in a diversified portfolio of
high quality money market instruments.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including distribution fees and expenses, which prospective invest-
ors will find helpful in making an investment decision. Investors are encour-
aged to read this Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 27, 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 Registered Representative of PFS Investments Inc. ("PFS Invest-
ments"). The Statement of Additional Information has been filed with the Secu-
rities and Exchange Commission (the "SEC") and is incorporated by reference
into this Prospectus in its entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 6
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 7
- -------------------------------------------------
VALUATION OF SHARES 12
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 12
- -------------------------------------------------
PURCHASE OF SHARES 13
- -------------------------------------------------
EXCHANGE PRIVILEGE 15
- -------------------------------------------------
REDEMPTION OF SHARES 16
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 19
- -------------------------------------------------
YIELD INFORMATION 19
- -------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST 19
- -------------------------------------------------
DISTRIBUTION 21
- -------------------------------------------------
ADDITIONAL INFORMATION 21
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing in high
quality short-term money market instruments. See "Investment Objective and Man-
agement Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public
only through the exchange of Class B shares of other Smith Barney Mutual Funds.
Class B shares of the Fund acquired through exchange are subject to the contin-
gent deferred sales charge ("CDSC"), if any, of the shares with which the
exchange is made. All Class B shares are subject to an annual distribution fee
of 0.50% of the value of average daily net assets of the Fund. Eight years
after the date of their original purchase, Class B shares will be automatically
redeemed at net asset value and the redemption proceeds will be reinvested, at
net asset value, in Class A shares of Smith Barney Money Funds Inc.--Cash Port-
folio ("Cash Portfolio"). Upon this conversion, the shares will no longer be
subject to the annual distribution fee.
INVESTMENT MINIMUMS Investors may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an individual retirement
account ("IRA") or a Self-Employed Retirement Plan. Subsequent investments of
at least $50 may be made for Class B shares. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the min-
imum initial and subsequent investment requirement is $25. See "Purchase of
Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Redemption of Shares."
MANAGEMENT OF THE FUND Mutual Management Corp. (the "Manager") serves as the
Fund's investment adviser and administrator. The Manager is a wholly owned sub-
sidiary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of Citigroup Inc. ("Citigroup"), Citigroup businesses
produce a broad range of financial services--asset management, banking and con-
sumer finance, credit and charge cards, insurance, investments, investment
banking and trading--and use diverse channels to make them available to con-
sumer and corporate customers around the world. Among these businesses
are Citibank, Commercial Credit, Primerica Financial Services, Salomon Smith
Barney Inc. ("Salomon Smith Barney"), SSBC Asset Management, Travelers Life &
Annuity, and Travelers Property Casualty. See "Management of the Trust and the
Fund."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
EXCHANGE PRIVILEGE Shares may be exchanged for Class B shares of certain other
funds of the Smith Barney Mutual Funds at the net asset value next determined.
See "Exchange Privilege."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Fund will be reinvested automatically in additional shares at current net asset
value unless otherwise specified by an investor. Shares acquired by dividend
and distribution reinvestment will not be subject to any CDSC. Class B shares
acquired through dividend and distribution reinvestments will become eligible
for conversion to Class A shares of the Cash Portfolio. See "Dividends, Distri-
butions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There is no assurance that the Fund
will achieve its investment objective. In light of the fees and CDSC imposed on
Class B shares, an investment in the Fund should be viewed as part of a long-
term investment in the Smith Barney Mutual Funds. Investors seeking only to
invest in a money market fund and who do not expect to re-exchange Fund shares
for Class B shares of other Smith Barney Mutual Funds should consider more
suitable investments, including other money market funds offered to the public
through PFS Investments. See "Investment Objective and Management Policies" and
"Purchase of Shares."
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur, either directly or indirectly, as a shareholder
of the Fund, based on the maximum CDSC that may be incurred at the time of
redemption and, unless otherwise noted, the Fund's operating expenses for its
most recent year:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND CLASS B
- ---------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC
(as a percentage of original cost or redemption proceeds, whichever
is lower) None*
- ---------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management fees 0.50%
12b-1 fee** 0.50
Other expenses*** 0.21
- ---------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.21%
- ---------------------------------------------------------------------------------
</TABLE>
* Class B shares of the Fund acquired through exchanges with shares of other
Funds of the Smith Barney Mutual Funds are subject to the CDSC, if any, of
the shares with which the exchange is made.
** Upon conversion, Class B shares will no longer be subject to a
distribution fee. Smith Barney receives an annual 12b-1 distribution fee
of 0.50% of the Fund's average daily net assets.
*** "Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration
fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the above table. See "Purchase of Shares," and "Management of the
Fund and the Trust."
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumes complete redemption at maximum
applicable CDSC at end of each time period $12 $38 $66 $147
Assumes no redemption $12 $38 $66 $147
</TABLE>
- -------------------------------------------------------------------------------
* Ten year figures assume exchange of Class B shares for Class A shares of
Smith Barney Money Funds, Inc.--Cash Portfolio at the end of the eighth year
following the date of original purchase of such Class B shares. Accordingly,
the expenses reflected above utilize the expenses of a Class A share of the
Cash Portfolio.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. This information
should be read in conjunction with the financial statements and related notes
that also appear in the Fund's 1998 Annual Report, which is incorporated by
reference into the Statement of Additional Information.
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE
FUND
YEAR ENDED JULY 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
Net investment income 0.044 0.043 0.044 0.044 0.022
Dividends from net investment
income (0.044) (0.043) (0.044) (0.044) (0.022)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN 4.51% 4.43% 4.53% 4.49% 2.18%
- ----------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 74 $ 117 $ 150 $ 160 $ 252
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.21% 1.16% 1.17% 1.24% 1.26%
Net investment income 4.43 4.34 4.45 4.35 2.24
- ----------------------------------------------------------------------------
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE
FUND
YEAR ENDED JULY 31, 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
Net investment income 0.021 0.040 0.062 0.074 0.0802
Dividends from net investment
income (0.021) (0.040) (0.062) (0.074) (0.0802)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN 2.15% 4.06% 6.36% 7.62% 8.32%
- ----------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 166 $ 225 $ 427 $ 687 $ 830
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.25% 1.22% 1.17% 1.15% 1.22%
Net investment income 2.16 4.13 6.27 7.42 8.36
- ----------------------------------------------------------------------------
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing in short-
term money market instruments, including: securities issued or guaranteed by
the United States government, its agencies and instrumentalities ("U.S. govern-
ment securities"); repurchase agreements with respect to the foregoing; bank
time deposits, certificates of deposit and bankers' acceptances; and high grade
commercial paper. The following is a brief description of the kinds of instru-
ments in which the Fund may invest:
U.S. government securities in which the Fund may invest include: direct obli-
gations of the United States Treasury such as Treasury Bills, Treasury Notes
and Treasury Bonds; obligations which are supported by the full faith and
credit of the United States such as Government National Mortgage Association
pass-through certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as securities of Federal
Home Loan Banks; and obligations which are supported by the credit of the
instrumentality, such as Federal National Mortgage Association and Federal Home
Loan Mortgage Association bonds. Because the United States government is not
obligated by law to provide support for an instrumentality that it sponsors,
the Fund will invest in obligations issued by such an instrumentality only when
the Fund's investment adviser determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
Certificates of Deposit, Time Deposits and Bankers' Acceptances in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, including branches of such banks, savings and loan associa-
tions and other banking institutions having total assets in excess of $1 bil-
lion. Certificates of deposit ("CDs") are short-term negotiable obligations of
commercial banks; time deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates;
and bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The Fund may invest in
U.S. dollar-denominated bank obligations, such as CDs, bankers' acceptances and
TDs, including instruments issued or supported by the credit of domestic or
foreign banks or savings institutions having total assets at the time of pur-
chase in excess of $1 billion. The Fund generally will invest at least 25% of
its assets in these securities. The Fund will invest in an obligation of a for-
eign bank or foreign branch of a domestic bank only if the Fund's investment
adviser deems the obligation to present minimal credit risks. Nevertheless,
this kind of obligation entails risks that are different from those
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of investments in domestic obligations of domestic banks due to differences in
political, regulatory and economic systems and conditions. The Fund will not
purchase TDs maturing in more than six months and will limit to no more than
10% of its assets its investment in TDs maturing from two business days
through six months.
Commercial Paper in which the Fund may invest is limited to debt obligations
of domestic and foreign issuers that at the time of purchase are Eligible
Securities (as defined below under "Fund Quality and Diversification") that
are (a) rated by at least one nationally recognized statistical rating organi-
zation ("NRSRO") in the highest rating category for short-term debt securities
or (b) comparable unrated securities. The Fund also may invest in variable
rate master demand notes, which are unsecured demand notes typically purchased
directly from large corporate issuers providing for variable amounts of prin-
cipal indebtedness and periodic adjustments in the interest rate according to
the terms of the instrument. Demand notes normally are not traded in a second-
ary market. However, the Fund may demand payment of principal and accrued
interest in full at any time without penalty. In addition, while demand notes
generally are not rated, their issuers must satisfy the same criteria as those
set forth above for issuers of commercial paper. The Manager will consider the
earning power, cash flow and other liquidity ratios of issuers of demand notes
and continually will monitor their financial ability to meet payment on
demand.
CERTAIN INVESTMENT POLICIES
Price and Portfolio Maturity. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining maturities
of thirteen months or less at the date of purchase by the Fund. For this pur-
pose, variable rate master demand notes (as described above under "Commercial
Paper"), which are payable on demand or, under certain conditions, at speci-
fied periodic intervals not exceeding thirteen months, in either case on not
more than 30 days' notice, will be deemed to have remaining maturities of
thirteen months or less. The Fund maintains a dollar-weighted average portfo-
lio maturity of 90 days or less. The Fund follows these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance
that it can do so on a continuing basis.
Fund Quality and Diversification. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal
credit risks and which are "Eligible Securities" at the time of acquisition by
the Fund. The term Eligible Securities includes securities rated by the "Req-
uisite NRSROs" in one of the two highest short-term rating categories, securi-
ties of issuers that have received such ratings with respect to other short-
term debt securities and comparable unrated securities. "Requisite NRSROs"
means (a) any two NRSROs that have issued a rating with respect to a security
or class of debt obligations of an issuer, or (b) one
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
NRSRO, if only one NRSRO has issued such a rating at the time that the Fund
acquires the security. If the Fund acquires securities that are unrated or
that have been rated by a single NRSRO, the acquisition must be approved or
ratified by the Trust's Board of Trustees. The NRSROs currently designated as
such by the SEC are Standard & Poor's Ratings Group, Moody's Investors Serv-
ice, Inc., Thomson BankWatch, Fitch IBCA Inc. and Duff & Phelps Credit Rating
Co. A discussion of the ratings categories of the NRSROs is contained in the
Appendix to the Statement of Additional Information.
The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In addi-
tion, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any
one issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the secu-
rities are rated by the Requisite NRSROs in the highest short-term rating cat-
egory, are securities of issuers that have received such rating with respect
to other short-term debt securities or are comparable unrated securities, and
(b) the Fund does not make more than one such investment at any one time.
Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund would
acquire a U.S. government security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The Fund will enter into repurchase agree-
ments with banks which are the issuers of instruments acceptable for purchase
by the Fund and certain dealers on the Federal Reserve Bank of New York's list
of reporting dealers. Under each repurchase agreement the selling institution
will be required to maintain the value of the securities subject to the repur-
chase agreement at not less than their repurchase price. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. The Fund's investment adviser or administrator, acting under
the supervision of the Trust's Board of Trustees, reviews on an ongoing basis
the value of the collateral and the
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
Mortgage- and Asset-Backed Securities--The Fund may purchase fixed or adjust-
able rate mortgage-backed securities issued by the Government National Mortgage
Association, Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation. In addition, the Fund may purchase other asset-backed
securities, including securities backed by automobile loans, equipment leases
or credit card receivables. These securities directly or indirectly represent a
participation in, or are secured by and payable from fixed or adjustable rate
mortgage or other loans which may be secured by real estate or other assets.
Unlike traditional debt instruments, payments on these securities include both
interest and a partial payment of principal. Prepayments of the principal of
underlying loans may shorten the effective maturities of these securities and
may result in the Fund having to reinvest proceeds at a lower interest rate.
CERTAIN INVESTMENT GUIDELINES
The Fund will concentrate its investments in the banking industry except dur-
ing temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not
acquire more than 10% of the voting or any other class of securities of any one
issuer, except that U.S. government securities may be purchased without regard
to these limits. In addition, the Fund may invest up to an aggregate of 10% of
its total assets in illiquid securities with contractual or other restrictions
on resale (excluding (i) securities subject to Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), provided at least two dealers make a mar-
ket in such securities and (ii) certain privately issued commercial paper eli-
gible for resale to institutional investors without registration pursuant to
Section 4(2) of the 1933 Act) and other instruments which are not readily mar-
ketable, including: (a) repurchase agreements providing for settlement in more
than seven days after notice by the Fund and (b) TDs maturing from two business
days through six months. The Fund also is authorized to borrow in an amount of
up to 10% of its total assets for temporary or emergency purposes, but not for
leverage, and to pledge its assets to the same extent in connection with such
borrowings. Whenever borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. A more detailed
description of these policies, together with an enumeration of additional
investment restrictions which the Fund has adopted and which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in the Statement of Additional Information.
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
SPECIAL CONSIDERATIONS AND RISK FACTORS
The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely to changes in the prevailing interest rates. Investors also
should recognize that, in periods of declining interest rates, the Fund's yield
will tend to be somewhat higher than prevailing market rates and, in periods of
rising interest rates, the Fund's yield will tend to be somewhat lower. Also,
when interest rates are falling, the inflow of net new money to the Fund from
the continuous sale of its shares will likely be invested in instruments pro-
ducing lower yields than the balance of its portfolio, thereby reducing the
Fund's current yield. In periods of rising interest rates, the opposite can be
expected to occur. In addition, securities in which the Fund will invest may
not yield as high a level of current income as might be achieved by investing
in securities with less liquidity and safety and longer maturities.
Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates, revalu-
ation of currencies, future political and economic developments and the possi-
ble imposition of currency exchange blockages or other foreign governmental
laws or restrictions and reduced availability of public information. Foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements applica-
ble to domestic issuers. In addition, there may be less publicly available
information about a foreign bank than about a domestic bank.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the Fund's operations,
including the handling of securities trades, pricing and account services. The
Manager and Salomon Smith Barney have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Manager has been
advised by the Fund's custodian, transfer agent, distributor and accounting
service agent that they are also in the process of modifying their systems with
the same goal. There can, however, be no assurance that the Manager, Salomon
Smith Barney or any other service provider will be successful, or that
interaction with other non-complying computer systems will not impair Fund
services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as
widespread or as affecting trading markets.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to each Class B share by the total number of Class B
shares outstanding. The Fund employs the amortized cost method of valuing
portfolio securities and intends to use its best efforts to continue to main-
tain a constant net asset value of $1.00 per share.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
The Fund declares dividends daily consisting of substantially all of its net
investment income, and pays dividends monthly. Any net realized gains will be
distributed at least annually. If a shareholder does not otherwise instruct,
dividends and capital gains will be reinvested automatically in additional
shares of Class B at net asset value subject to no CDSC. Dividends and distri-
butions are treated the same for tax purposes whether taken in cash or rein-
vested in additional shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Trust-wide basis.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. In any taxable year in
which the Fund so qualifies and distributes at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and the excess of any net short-term capital gains over net long-term capital
losses), the Fund (but not its shareholders) generally will be relieved of
federal income tax on the investment company taxable income and net realized
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, distributed to shareholders. In order to qualify as a
regulated investment company, the Fund will be required to meet various Code
requirements.
12
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gain dividends are taxable to shareholders as long-term
capital gain regardless of the length of time a shareholder may have held
shares of the Fund.
Dividends (including capital gain dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capi-
tal assets in the shareholder's hands, and generally will be long-term or
short-term depending upon the shareholder's holding period for the shares. Any
loss realized by a shareholder on disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss
to the extent of any distributions of capital gain dividends received by the
shareholder with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from obligations of the United States government
and certain of its agencies and instrumentalities may be exempt from all state
and local income taxes. Shareholders should consult their tax advisers for
specific information on the tax consequences of particular types of distribu-
tions.
PURCHASE OF SHARES
Fund shares may be acquired only through exchanges with Class B shares of
other Smith Barney Mutual Funds. Class B shares acquired through exchange are
subject to the CDSC, if any, of the shares with which the exchange is made.
In light of the distribution fee imposed on Class B shares, an investment in
the Fund should be viewed as part of a long-term investment in the Smith
Barney Mutual Funds. Investors seeking only to invest in a money market fund
and who do not expect to exchange Fund shares for shares of other Smith Barney
Mutual Funds
13
<PAGE>
PURCHASE OF SHARES (CONTINUED)
should consider more suitable investments, including other money market funds
offered through PFS Investments.
The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing in
the Fund, among other things, investors should consider that certain other
funds with an investment objective and policies similar to those of the Fund do
not pay distribution expenses or impose any sales charge.
Class B shares will convert automatically to Class A shares of the Cash Port-
folio eight years after the date on which they were purchased and will thereaf-
ter 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 share-
holder 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.
The minimum initial investment requirement in the Fund for an account estab-
lished under the Uniform Gift to Minors Act is $250 and the minimum subsequent
investment requirement is $50.
Upon completion of certain automated systems, initial purchases of Fund
shares may be made by wire. The minimum investment that can be made by wire is
$10,000. Before sending the wire, the PFS Investments Inc. Registered Represen-
tative must contact PFS Shareholder Services, the Fund's sub-transfer agent
(the "Sub-Transfer Agent") at (800) 665-8677 to obtain proper wire instruc-
tions.
Once an account is open, a shareholder may make additional investments by
wire. The shareholder should contact the Sub-Transfer Agent at (800) 544-5445
to obtain proper wire instructions.
SUBSEQUENT INVESTMENTS BY TELEPHONE
Upon completion of certain automated systems, shareholders who establish tel-
ephone transaction authority on their account and supply bank account informa-
tion may make additions to their accounts at any time. Shareholders should con-
tact the Sub-Transfer Agent at (800) 544-5445 between 9:00 a.m. and 6:00 p.m.
eastern time any day that the NYSE is open. If a shareholder does not wish to
allow subsequent investments to be made by telephone by any person in his
account, he should decline the telephone transaction option on the account
application. The minimum telephone subsequent investment is $250 and can be up
to a maximum of $10,000. By requesting a subsequent purchase by telephone, you
authorize the Sub-Transfer agent to transfer funds from the bank account pro-
vided for the amount of the purchase. A shareholder who has sufficient funds to
complete the transfer will be charged a fee of up to $25 by the Sub-Transfer
Agent. A shareholder who places a stop payment on a transfer or the transfer is
returned because the account has been closed, will also be charged a fee of up
to $25 by the Sub-Transfer Agent. Subse -
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
quent investments by telephone may not be available if the shareholder cannot
reach the Sub-Transfer Agent whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
regular subsequent investment procedure described above.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares in connection with a combination of
the Fund with any investment company by merger, acquisition of assets or other-
wise. In addition, a shareholder who has redeemed shares from other Smith Bar-
ney 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 the Sub-Transfer
Agent of the shareholder's status or holdings, as the case may be.
EXCHANGE PRIVILEGES
Except as otherwise noted below, Class B shares may be exchanged for Class B
shares in the following Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges are subject
to minimum investment requirements and other requirements of the fund into
which exchanges are made.
FUND NAME
.Concert Investment Series--Emerging Growth Fund
.Concert Investment Series--Government Fund
.Concert Investment Series--Growth Fund
.Concert Investment Series--Growth and Income Fund
.Concert Investment Series--International Equity Fund
.Concert Investment Series--Municipal Fund
.Concert Peachtree Growth Fund
.Concert Social Awareness Fund
.Smith Barney Appreciation Fund Inc.
.Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
.Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
.Smith Barney Concert Allocation Series Inc.--Global Portfolio
.Smith Barney Concert Allocation Series Inc.--Growth Portfolio
.Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
15
<PAGE>
EXCHANGE PRIVILEGES (CONTINUED)
.Smith Barney Concert Allocation Series Inc.--Income Portfolio
.Smith Barney Investment Grade Bond Fund
In the event a Class B shareholder wishes to exchange all or a portion of his
or her shares in any of the funds imposing a CDSC higher than that imposed by
the Fund, the exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an exchange, the new Class B shares will be deemed to have been pur-
chased on the same date as the Class B shares of the Fund that have been
exchanged.
Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Fund reserves the right to modify or discontinue exchange privi-
leges upon 60 days' prior notice to shareholders.
Upon completion of certain automated systems, shareholders who establish tel-
ephone transaction authorization on their account may request an exchange by
telephone. If a shareholder does not wish to allow telephone exchanges by any
person in his account, he should decline the telephone transaction option on
the account application. 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. Exchanges between funds involving exact registrations
do not require a signature guarantee. 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. Each Portfolio reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice
to shareholders.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares of the Fund at
any time by sending a written request in proper form directly to the Sub-Trans-
fer Agent, at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30099-0062.
If you should have any questions concerning how to redeem your account after
reviewing the information below, please contact the Sub-Transfer Agent at (800)
544-5445, Spanish-speaking representatives (800) 544-7278 or TDD Line for the
Hearing Impaired (800) 824-1721.
16
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
As described under "Purchase of Shares," redemptions of Class B shares are
subject to a contingent deferred sales charge.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account registra-
tion. If the proceeds of the redemption exceed $50,000, or if the proceeds are
not to be paid to the record owner(s) at the record address, if the sharehold-
er(s) has had an address change in the past 45 days, or if the shareholder(s)
is a corporation, sole proprietor, partnership, trust or fiduciary, signa-
ture(s) must be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered secu-
rities association or clearing agency; a savings and loan association; or a
federal savings bank.
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accompany the redemption request. Additional documentary evidence of authority
is also required by the Sub-Transfer Agent in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.
Additionally, if a shareholder requests a redemption from a Retirement Plan
account (IRA, SEP or 403(b)(7)), such request must state whether or not federal
income tax is to be withheld from the proceeds of the redemption check.
A shareholder may utilize the Sub-Transfer Agent's FAX to redeem his or her
account as long as a signature guarantee or other documentary evidence is not
required. Redemption requests should be properly signed by all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-2374. Facsimile
redemptions may not be available if the shareholder cannot reach the Sub-Trans-
fer Agent by FAX, whether because all telephone lines are busy or for any other
reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure described above. Facsimile redemptions received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day
will be processed at the net asset value per share determined that day.
A shareholder may utilize the Sub-Transfer Agent's Telephone Redemption serv-
ice to redeem his or her account as long as they have authorized the telephone
redemption option. If a shareholder does not wish to allow telephone redemp-
tions by any person in his account, he should decline the telephone transaction
option on the account application. The telephone redemption option can be used
only if: (a) the redemption proceeds are to be mailed to the address of record
and there has been no change of address of record within the preceding 45 days;
(b) the shares to be redeemed are not in certificate form; (c) the person
requesting the redemption can provide proper identification information; and
(d) the proceeds of the redemption do not exceed $50,000. 403(b)(7) accounts
and accounts not registered in the
17
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
name of the individual(s) are not eligible for the telephone redemption option.
Telephone redemption requests can be made by contacting the Sub-Transfer Agent
at (800) 544-5445 between 9:00 a.m. and 6:00 p.m. Eastern time any day that the
NYSE is open. Telephone redemption may not be available if the shareholder can-
not reach the Sub-Transfer Agent whether because all telephone lines are busy
or for any other reason; in such case, a shareholder would have to use the
Fund's regular redemption procedure described above.
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed will be made by
check mailed within three business days after acceptance by the Sub-Transfer
Agent of the request and any other necessary documents in proper order. Such
payment may be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check or draft, the Sub-Transfer Agent may hold the payment of the proceeds
until the purchase check or draft has cleared, usually a period of up to 15
days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
After following the above-stated redemption guidelines, a shareholder may
elect to have the redemption proceeds transferred via Wire or ACH directly to
the shareholder's bank account of record (defined as a currently established
pre-authorized draft on the shareholder's account included with the application
or with no changes within the previous 45 days) as long as the bank account is
registered in the same name(s) as the account with the Fund. If the proceeds
are not to be transferred to the bank account of record or mailed to the regis-
tered owner, the request must be submitted in writing and a signature guarantee
will be required from all shareholders. A $25 wire fee or a $2.50 ACH service
fee will be charged by the Sub-Transfer Agent to help defray the administrative
expense of executing a wire or ACH redemption. Redemption proceeds will nor-
mally be sent to the designated bank account on the next business day following
the redemption, and should ordinarily be credited to the shareholder's bank
account by his/her bank within 48 to 72 hours for wire transfers and 72 to 96
hours for ACH transfers.
Additional Information regarding Telephone Redemption Program. Neither the
Fund or its agents will be liable for following instructions communicated by
telephone that are reasonably believed to be genuine. The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days prior notice to shareholders.
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
18
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
periodic cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds. Any applicable CDSC will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal plan com-
mences. For further information regarding the automatic cash withdrawal plan,
shareholders should contact the Sub-Transfer Agent.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
YIELD INFORMATION
From time to time, the Fund may advertise its yield and effective yield of
Class B shares. These yield figures are based on historical earnings and are
not intended to indicate future performance. The yield of a Class B share
refers to the net investment income generated by an investment in that Class
over a specific seven-day period (which will be stated in the advertisement).
This net investment income is then annualized. The effective yield is calcu-
lated similarly but, when annualized, the income earned by an investment in
the Class is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of the assumed rein-
vestment.
MANAGEMENT OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all sig-
nificant agreements between the Trust and the companies that furnish services
to the Fund, including agreements with its investment adviser, administrator,
custodian, transfer and sub-transfer agents. The day-to-day operations of the
Fund are delegated to its investment adviser and administrator. The Statement
of Additional Information contains general background information regarding
each Trustee and executive officer of the Fund.
19
<PAGE>
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
INVESTMENT ADVISER
The Manager is located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's investment adviser. The Manager (through its predecessors)
has been in the investment counseling business since 1968 and is a registered
investment adviser. The Manager renders investment advice to investment compa-
nies that had aggregate assets under management as of September 30, 1998 in
excess of $108 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment services rendered, the Fund pays the Manager a fee at the
annual rate of 0.30% of the Fund's average daily net assets.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of 0.20% of the
Fund's average daily net assets.
On October 8, 1998, Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. The Manager does not believe that
its compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.
PORTFOLIO MANAGEMENT
Phyllis M. Zahorodny, Managing Director of Salomon Smith Barney and Invest-
ment Officer of the Fund, is responsible for managing the day-to-day operations
of the Fund including making all investment decisions.
Ms. Zahorodny's management discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 are
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Registered Representa-
tive of PFS or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
20
<PAGE>
DISTRIBUTION
CFBDS Inc. located at 21 Milk Street, Boston, MA 02109-5408 distributes
shares of the Fund as a principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS Inc. to take
and pay for only such securities as may be sold to the public. The Fund has
adopted a plan of distribution adopted by the Fund under Rule 12b-1 under the
1940 Act (the "Plan"), pursuant to which PFS is paid an annual distribution fee
with respect to Class B shares at the annual rate of 0.50% of the average daily
net assets attributable to that Class. Class B shares that automatically con-
vert to Class A shares of Cash Portfolio eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are paid to
PFS which, in turn pays PFS Investments to pay its Registered Representatives
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of PFS Invest-
ments Registered Representatives and other persons who provide support services
in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of PFS Investments associated with the
sale of Fund shares, including lease, utility, communications and sales promo-
tion expenses.
PFS Investments may be deemed to be an underwriter for purposes of the 1933
Act. From time to time, PFS Investments or its affiliates may also pay for cer-
tain non-cash sales incentives provided to PFS Investments Registered Repre-
sentatives. Such incentives do not have any effect on the net amount invested.
In addition to the reallowances from the applicable public offering price
described above, PFS Investments may, from time to time, pay or allow addi-
tional reallowances or promotional incentives, in the form of cash or other
compensation to PFS Investments Registered Representatives that sell shares of
the Fund.
Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred and the payments may exceed distribution expenses actually
incurred. The 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 PFS, amounts received under the
Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. When matters are submitted for shareholder
vote, shareholders of each fund of the Trust will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held.
Shares of the Trust will be voted generally on a Trust-wide basis on all mat-
ters except matters affecting the interests of one Fund or one Class of shares.
21
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares and the Fund will assist shareholders in
calling such a meeting as required by the 1940 Act.
PNC Bank, National Association is located at 17th and Chestnut Streets,
Philadelphia, PA 19103, and serves as custodian of the Trust's investments.
First Data Investor Services Group, Inc. is located at Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Trust's transfer agent.
PFS Shareholder Services is located at 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0002, and serves as the Fund's Sub-Transfer Agent.
The Fund sends to each shareholder a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Trust. In an effort to reduce the Fund's printing and mailing costs, the Fund
plans to consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record will receive a single copy of each report.
Any shareholder who does not want this consolidation to apply to his or her
account should contact the Sub-Transfer Agent.
Also available at the shareholder's request is an Account Transcript identi-
fying every financial transaction in an account since it was opened. To defray
administrative expenses involved with providing multiple years worth of infor-
mation, there is a $25 charge for each Account Transcript requested.
Additional copies of tax forms are available at the shareholder's request. A
$10 fee for each tax form will be assessed.
Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 554-5445.
22
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
PROSPECTUS
SMITH BARNEY
High
Income
Fund
November 27, 1998
Prospectus begins on page one
<PAGE>
- --------------------------------------------------------------------------------
Prospectus November 27, 1998
- --------------------------------------------------------------------------------
Smith Barney High Income Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney High Income Fund (the "Fund") seeks to provide shareholders
with high current income by investing in a diversified portfolio of
high-yielding corporate bonds, debentures and notes.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.
The Fund invests primarily in lower-rated bonds, commonly known as "junk
bonds." Bonds of this type are subject to a greater risk of loss of principal
and interest. Purchasers should carefully assess the risks associated with an
investment in the Fund. See "Risk Factors and Special Considerations."
This Prospectus sets forth concisely certain information about the Fund
and the Trust, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference. Shares of other investment funds offered by the Trust
are described in separate prospectuses that may be obtained by calling the Trust
at the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 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 Salomon 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.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 15
- --------------------------------------------------------------------------------
Valuation of Shares 27
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 28
- --------------------------------------------------------------------------------
Purchase of Shares 30
- --------------------------------------------------------------------------------
Exchange Privilege 38
- --------------------------------------------------------------------------------
Redemption of Shares 41
- --------------------------------------------------------------------------------
Minimum Account Size 44
- --------------------------------------------------------------------------------
Performance 44
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 45
- --------------------------------------------------------------------------------
Distributor 46
- --------------------------------------------------------------------------------
Additional Information 47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
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 this
Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current income by investing primarily in a diversified
portfolio of high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars and foreign currencies. Although growth of capital is not an
investment objective of the Fund, Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) may consider potential for
growth as one factor, among others, in selecting investments for the Fund. Up to
40% of the Fund's assets may be invested in fixed-income obligations of foreign
issuers, and up to 20% of its assets may be invested in common stock or other
equity or equity-related securities, including convertible securities, preferred
stock, warrants and rights. Securities purchased by the Fund generally will be
rated in the lower rating categories by a nationally recognized statistical
rating organization ("NRSRO"), as low as Caa by Moody's Investors Service, Inc.
("Moody's") or D by Standard & Poor's Ratings Group ("S&P"), or in unrated
securities of comparable quality. See "Investment Objective and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $15,000,000. A fifth
Class, Class Z shares, is offered pursuant to a separate prospectus exclusively
to (a) tax-exempt employee benefit and retirement plans of Salomon Smith Barney
Inc. ("Salomon Smith Barney") and its affiliates and (b) unit investment trusts
("UITs") sponsored by Salomon Smith Barney and its affiliates. See "Purchase of
Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares 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 --
Reduced or No Initial Sales
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the average daily net assets of
the Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001 purchasers of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L 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 $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fee.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended 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
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class L 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, Class L shares which have a lower initial sales charge but
are subject to higher distribution fees than Class A shares, are suitable for
investors who are not investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or
undetermined time frame.
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 L 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
L 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 will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more may be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
other Smith BarneyMutual Funds listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Purchase
of Shares."
Salomon Smith Barney Financial Consultants may receive different
compensation for selling different Classes of shares. Investors should
understand that the purpose of the CDSC on the Class B and Class L 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 among the Classes of
shares.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) 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
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
"Code"), as well as other types of participant-directed, tax-qualified employee
benefit plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) program. Class A and Class L shares are available without a sales
charge as investment alternatives for both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney. (An investment dealer in the
selling group and a broker that clears securities through Salomon Smith Barney
are collectively referred to as "Dealer Representatives.") In addition, certain
investors, including qualified retirement plans and investors purchasing through
certain Dealer Representatives, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investors Service Group, Inc.
("First Data" or the "Transfer Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. There is no minimum investment requirement for Class A for unitholders
who invest distributions from a UIT sponsored by Salomon 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 L shares and the minimum 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."
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND MMC serves as the Fund's investment
adviser and administrator. MMC provides investment advisory and management
services to investment companies affiliated with Salomon Smith Barney. MMC is a
wholly owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world. Among
these businesses are Citibank, Commercial Credit, Primerica Financial Services,
Salomon Smith Barney, SSBC Asset Management, Travelers Life & Annuity, and
Travelers Property Casualty. See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. 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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium- or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
in when-issued and delayed-delivery transactions, lending portfolio securities
and entering into options on futures contracts and currencies. See "Investment
Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund, based on the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund Class A Class B Class L* Class Y
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None 1.00% None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None** 4.50% 1.00% None
- -----------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.70% 0.70% 0.70% 0.70%
12b-1 fees*** 0.25 0.75 0.70 None
Other expenses 0.10 0.10 0.08 0.02
- -----------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.05% 1.55% 1.48% 0.72%
=========================================================================================
</TABLE>
* Class C shares were renamed Class L shares effective June 12, 1998.
** 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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. (the
"NASD").
Class A shares of the Fund purchased through the Salomon 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 Salomon 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 L and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon Smith Barney
also receives,
8
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
with respect to Class B shares, an annual 12b-1 fee of 0.75% of the value of
average daily net assets of that Class, consisting of a 0.50% distribution fee
and a 0.25% service fee. For Class L shares, Salomon Smith Barney receives an
annual 12b-1 fee of 0.70% of the value of average daily net assets of this
Class, consisting of a 0.45% distribution fee and a 0.25% service fee. "Other
expenses" in the above table include fees for shareholder services, custodial
fees, legal and accounting fees, printing costs and registration fees.
Example The following example is intended to assist an investor in under
standing 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 High Income Fund 1 year 3 years 5 years 10 years*
================================================================================
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A $55 $77 $100 $167
Class B 61 79 94 171
Class L 35 56 90 185
Class Y 7 23 40 89
An investor would pay the following expenses on the same
investment, assuming the same annual return and no redemption:
Class A $55 $77 $100 $167
Class B 16 49 84 171
Class L 25 56 90 185
Class Y 7 23 40 89
================================================================================
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1998 Annual Report, which is incorporated
by reference into the Statement of Additional Information.
For a Class A share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31, 1998 1997 1996 1995 1994 1993(1)
========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.82 $10.98 $11.10 $11.16 $12.01 $11.03
- --------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 1.02 1.09 1.08 1.08 1.08 0.75
Net realized and unrealized
gain (loss) on investments (0.01) 0.83 (0.12) (0.02) (0.81) 1.09
- --------------------------------------------------------------------------------------------------------
Total Income From Operations 1.01 1.92 0.96 1.06 0.27 1.84
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.09) (1.08) (1.08) (1.05) (1.12) (0.86)
Capital -- -- -- (0.07) -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (1.09) (1.08) (1.08) (1.12) (1.12) (0.86)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.74 $11.82 $10.98 $11.10 $11.16 $12.01
- --------------------------------------------------------------------------------------------------------
Total Return 8.85% 18.31% 8.95% 10.28% 2.11% 17.29%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 512 $ 424 $ 341 $ 317 $ 234 $ 242
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.05% 1.06% 1.10% 1.11% 1.11% 1.16%+
Net investment income 8.61 9.57 9.65 10.03 9.27 9.52+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 78% 72% 60% 98% 95%
========================================================================================================
</TABLE>
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31, 1998 1997 1996 1995 1994 1993
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $11.83 $10.99 $11.11 $11.16 $12.01 $11.15
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.96 1.03 1.02 1.03 1.02 1.08
Net realized and unrealized
gain (loss) on investments (0.01) 0.83 (0.12) (0.02) (0.81) 0.88
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.95 1.86 0.90 1.01 0.21 1.96
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.03) (1.02) (1.02) (0.99) (1.06) (1.10)
Capital -- -- -- (0.07) -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (1.03) (1.02) (1.02) (1.06) (1.06) (1.10)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $11.75 $11.83 $10.99 $11.11 $11.16 $12.01
- --------------------------------------------------------------------------------------------------------------
Total Return 8.34% 17.72% 8.41% 9.77% 1.60% 18.55%
- --------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $ 859 $ 681 $ 560 $ 478 $ 510 $ 449
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55% 1.55% 1.59% 1.61% 1.60% 1.66%
Net investment income 8.11 9.07 9.16 9.52 8.77 9.02
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 78% 72% 60% 98% 95%
==============================================================================================================
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31, 1992 1991 1990 1989
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.05 $10.59 $13.36 $14.01
- ---------------------------------------------------------------------------------
Income From Operations:
Net investment income 1.11 1.27 1.53 1.61
Net realized and unrealized
gain (loss) on investments 1.16 (0.52) (2.68) (0.73)
- ---------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.27 0.75 (1.15) 0.88
- ---------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.11) (1.27) (1.61) (1.53)
Capital (0.06) (0.02) (0.01) --
- ---------------------------------------------------------------------------------
Total Distributions (1.17) (1.29) (1.62) (1.53)
- ---------------------------------------------------------------------------------
Net Asset Value, End of Year $11.15 $10.05 $10.59 $13.36
- ---------------------------------------------------------------------------------
Total Return 23.86% 8.82% (8.66)% 6.60%
- ---------------------------------------------------------------------------------
Net Assets, End of Year (millions) $304 $239 $323 $610
- ---------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.65%# 1.75% 1.68% 1.63%
Net investment income 10.52 13.30 12.93 11.93
- ---------------------------------------------------------------------------------
Portfolio Turnover Rate 137% 112% 43% 74%
=================================================================================
</TABLE>
# The annualized operating expense ratio excludes interest expense. The
annualized operating expense ratio including interest expense was 1.66% for
the year ended July 31, 1992.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class L(1) share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31, 1998 1997 1996 1995(2)(3)
==============================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.84 $11.00 $11.11 $10.90
- ------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.97 1.04 1.03 0.95
Net realized and unrealized
gain (loss) on investments (0.01) 0.83 (0.11) 0.23
- ------------------------------------------------------------------------------
Total Income From Operations 0.96 1.87 0.92 1.18
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.04) (1.03) (1.03) (0.90)
Capital -- -- -- (0.07)
- ------------------------------------------------------------------------------
Total Distributions (1.04) (1.03) (1.03) (0.97)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $11.76 $11.84 $11.00 $11.11
- ------------------------------------------------------------------------------
Total Return 8.38% 17.77% 8.56% 11.50%++
- ------------------------------------------------------------------------------
Net Assets, End of Year (millions) $93 $44 $21 $6
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.48% 1.48% 1.51% 1.56%+
Net investment income 8.15 9.14 9.23 9.58+
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 78% 72% 60%
==============================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) On November 7, 1994 the former Class D shares were renamed Class C shares.
(3) For the period from August 24, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class Y share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31, 1998 1997 1996 1995(1)
===============================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.84 $10.99 $11.10 $10.88
- -------------------------------------------------------------------------------
Income From Operations:
Net investment income 1.05 1.12 0.92 0.09
Net realized and unrealized
gain (loss) on investments (0.01) 0.84 (0.11) 0.23
- -------------------------------------------------------------------------------
Total Income From Operations 1.04 1.96 0.81 0.32
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.11) (1.11) (0.92) (0.03)
Capital -- -- -- (0.07)
- -------------------------------------------------------------------------------
Total Distributions (1.11) (1.11) (0.92) (0.10)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $11.77 $11.84 $10.99 $11.10
- -------------------------------------------------------------------------------
Total Return 9.18% 18.68% 9.32% 2.91%++
- -------------------------------------------------------------------------------
Net Assets, End of Year (millions) $212 $139 $35 $10
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.72% 0.73% 0.76% 0.86%+
Net investment income 8.83 9.90 9.98 10.28+
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 78% 72% 60%
===============================================================================
</TABLE>
(1) For the period from April 28, 1995 (inception date) to July 31, 1995.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is high current income. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its objective. Although growth of capital is not an investment
objective of the Fund, MMC may consider potential for growth as one factor,
among others, in selecting investments for the Fund. The Fund will seek high
current income by investing, under normal circumstances, at least 65% of its
assets in high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars or foreign currencies. Up to 40% of the Fund's assets may be
invested in fixed-income obligations of foreign issuers, and up to 20% of its
assets may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants and
rights. Securities purchased by the Fund generally will be rated in the lower
rating categories, as low as Caa by Moody's or D by S&P or an equivalent rating
by any NRSRO, or in unrated securities that MMC deems of comparable quality.
However, the Fund will not purchase securities rated lower than B by both
Moody's and S&P unless, immediately after such purchase, no more than 10% of its
total assets are invested in such securities. The Fund may hold securities with
higher ratings when the yield differential between low-rated and higher-rated
securities narrows and the risk of loss may be reduced substantially with only
a relatively small reduction in yield. The Fund may also invest in zero coupon
bonds and payment-in-kind bonds. The Fund also may invest in higher-rated
securities when MMC believes that a more defensive investment strategy is
appropriate in light of market or economic conditions. The Fund also may lend
its portfolio securities, purchase or sell securities on a when-issued or
delayed-delivery basis and write covered call options on securities. In order to
mitigate the effects of uncertainty in future exchange rates, the Fund may
engage in currency exchange transactions and purchase options on foreign
currencies. The Fund also may hedge against the effects of changes in the value
of its investments by purchasing put and call options on interest rate futures
contracts. Special considerations associated with the Fund's investments are
described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Covered Option Writing. The Fund may write (sell) call options on
securities. The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options. A call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price at any time during the option period.
Thus, the purchaser of a call option
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
written by the Fund has the right to purchase from the Fund the underlying
security owned by the Fund at the agreed-upon price for a specified time period.
Upon the exercise of a call option written by the Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option.
The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit
or to unfreeze an underlying security (thereby permitting its sale or the
writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.
Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
ADDITIONAL INVESTMENTS
Money Market Instruments. When MMC believes that market conditions
warrant, the Fund may adopt a temporary defensive posture and may invest in
short-term instruments without limitation. Short-term instruments in which the
Fund may invest include: U.S. government securities; certain bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent rating by any NRSRO or, if unrated, of an issuer
having
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements as described below.
United States Government Securities. U.S. government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities. The U.S. government securities in which the Fund may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities that are
supported by the right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") bonds). Treasury Bills have maturities of less than 1 year, Treasury
Notes have maturities of 1 to 10 years and Treasury Bonds generally have
maturities of greater than 10 years at the date of issuance. Certain U.S.
government securities, such as those issued or guaranteed by GNMA, FNMA and
FHLMC, are mortgage-related securities. U.S. government securities generally do
not involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
Zero Coupon Bonds. 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
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week), subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This arrangement
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The value of the underlying securities will be
at least equal at all times to the total amount of the repurchase obligation,
including interest. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays in
or restrictions upon the Fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of losing
all or part of the income from the agreement. MMC, acting under the supervision
of the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund may enter into repurchase agreements to evaluate potential risks.
Futures Contracts and Options on Futures Contracts. When deemed advisable
by MMC, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities due to anticipated changes in
interest rates, currency values and market conditions and when the transactions
are economically appropriate to the reduction of risks inherent in the
management of the Fund. The Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premiums paid for
unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission), exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash, U.S.
government securities, equity securities or debt securities of any grade,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees ("eligible segregated assets"), plus accrued profits held in a
segregated account.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will affect
the Fund's performance.
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
The Fund may also purchase American Depositary Receipts ("ADRs"); European
Depositary Receipts and Global Depositary Receipts 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 depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligation and the depositary'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.
Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock. The Fund's investments in each of equipment
leases or equipment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the Fund
may engage in currency exchange transactions and purchase exchange-traded put
and call options on foreign currencies. The Fund will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The Fund's dealings in forward currency exchange
and options on foreign currencies are limited to hedging involving either
specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase put options on a foreign currency in which
securities held by the Fund are denominated to protect against a decline in the
value of the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
related transaction costs. Options on foreign currencies purchased by the Fund
may be traded on domestic and foreign exchanges or traded over-the-counter.
Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell any portfolio securities on a when-issued or delayed-delivery basis. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage. In such transactions,
delivery of the securities occurs beyond the normal settlement 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 consisting of cash,
U.S. government securities, equity securities or debt securities of any grade
having a value equal to or greater than the Fund's purchase commitments,
provided such securities have been determined by MMC 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. The Fund will not accrue
income with respect to a when-issued security prior to its stated delivery date.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities that are maintained at all times in an amount at least equal to
the current market value of the loaned securities.
Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a result, the Fund may be forced to sell these securities at less than
fair market value or may not be able to sell them when MMC believes it desirable
to do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
desire to sell any of these securities when a ready buyer is not available at a
price that the Fund deems representative of its value, the value of the Fund's
net assets could be adversely affected.
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calendar days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended ("the 1933 Act") ("Rule
144A Securities").
In addition, the Fund may invest up to 5% of its assets in the securities
of issuers which have been in continuous operation for less than three years.
The Fund also may borrow from banks for temporary or emergency purposes, but not
for investment purposes, in an amount up to 10% of its total assets, and may
pledge its assets to the same extent in connection with such borrowings.
Whenever these borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any additional investments. Except for the limitations on
borrowing, the investment guidelines set forth in this paragraph may be changed
at any time without shareholder consent by vote of the Trust's Board of
Trustees. A complete list of investment restrictions that identifies additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by MMC.
Successful use by the Fund of options will depend on MMC's ability to correctly
predict movements in the direction of the stock underlying the option used as a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.
Medium-, Low- and Unrated Securities. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal. Generally, these securities offer a higher current
yield than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default or bankruptcy of the issuers of such securities. Medium-
and low-rated and comparable unrated securities will likely have large
uncertainties or major risk exposures to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held by the Fund, with a commensurate effect on the
value of the Fund's shares.
The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for medium- and low-rated and comparable unrated securities
has not fully weathered a major economic recession. Any such economic downturn
could adversely affect the value of such securities and the ability of the
issuers of these securities to repay principal and pay interest thereon.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic
24
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
conditions than higher-rated securities. In addition, medium- and low-rated and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and low-rated and comparable unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Fund may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P or an equivalent
rating by any NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of a desirable investment and assurance of interest and
principal payments over any long period of time may be small. Securities which
are rated Caa or CCC or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
Securities rated C by Moody's and D by S&P are in the lowest rating class and
indicate that payments are in default or that a bankruptcy petition has been
filed with respect to the issuer or that the issuer is regarded as having
extremely poor prospects. See the Appendix in the Trust's Statement of
Additional Information on bond ratings by Moody's and S&P.
In light of these risks, MMC, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which
are unregistered securities restricted to purchase by "qualified institutional
buyers"
25
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities are
freely transferable among qualified institutional buyers, a liquid market may
exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.
Real Estate Investment Trusts. The Fund may purchase real estate
investment trusts ("REITs"). REITs are investment vehicles that invest primarily
in either real estate or real estate loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or security mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs and the management skill of the REIT's
manager. REITs are also subject to risks generally associated with investments
in real estate.
Asset-Backed Securities. The Fund may invest in asset-backed securities
("ABSs"). An ABS 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 credit worthiness
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 the ABS, as will the exhaustion of any credit enhancement. The risks of
investing in ABSs ultimately will depend upon the payment of the consumer loans
by the individual borrowers. In its capacity as purchaser of the ABS, the Fund
will generally have no recourse to the entity that originated the loans in the
event of default by the borrower. In addition, the loans underlying the ABSs are
subject to prepayments, which may shorten the weighted average life of such
securities and may lower their return.
Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer
26
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
agent, distributor and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that MMC, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on behalf of the
Fund are placed by MMC with brokers and dealers (including Salomon Smith Barney)
that MMC selects. The Fund may utilize Salomon Smith Barney or a Salomon Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when MMC believes that the broker's charge for the transactions does not exceed
usual and customary levels. The same standard applies to the use of Salomon
Smith Barney as a commodities broker in connection with entering into options
and futures contracts.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding. Net asset value is calculated separately for
Class A, B, L and Y shares.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Trust's Board of Trustees or delegates. A security that is
traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at
27
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. Investments in U.S.
government securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trustees determine that amortized cost reflects fair value of
those investments. An option generally is valued at the last sale price or, in
the absence of the last sale price, the last offer price. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and distributions
will be reinvested automatically in additional shares of the same Class at net
asset value, subject to no sales charge or CDSC. Dividends from net investment
income, if any, of the Fund will be paid monthly. The Fund's final distribution
for each calendar year will include any remaining net investment income and net
realized long- and short-term capital gains realized during the year and deemed
undistributed during the year for Federal income tax purposes. In order to avoid
the application of a 4% nondeductible excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gains, the Fund may
make any additional distributions as may be necessary to avoid the application
of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B and Class L shares of the Fund may be
lower than the per share dividends on Class A and Y shares principally as a
result
28
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
of the distribution fee applicable with respect to Class B and Class L 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 L and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. 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.
Each shareholder will receive a statement annually from the Trust, which
will set forth separately the aggregate dollar amount of dividends and capital
gains distributed to the shareholder by the Fund with respect to the prior
calendar year.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders are urged to consult their tax advisers regarding the
application of Federal, state and local tax laws to their specific situation
before investing in the Fund.
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge as
follows:
Sales Charge Sales Charge Dealer's
as a % of as a % of Reallowance as %
Amount of Investment Transaction Amount Invested 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 Salomon Smith Barney, which compensates Salomon
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 L shares
is waived. See "Deferred Sales Charge Provisions" 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. 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 intermediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. Salmon Smith Barney and Dealer Representatives 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 the Transfer Agent are not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in
the Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. 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 L shares and
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 required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a UIT sponsored by Salomon Smith
Barney and Directors/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 the Transfer Agent. Share certificates are issued only upon a
shareholder's written request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 a Dealer
Representative 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 the Fund's
agent prior to it's close of business. For shares purchased through Salomon
Smith Barney or a Dealer
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Representative purchasing through Salomon Smith Barney, payment for Fund shares
is due on the third business day after the trade 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, Salomon Smith Barney or the Transfer
Agent is authorized through preauthorized 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 on a monthly or
quarterly basis, as indicated by the shareholder, to provide for 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 Salomon
Smith Barney or the Transfer Agent. The Systematic Investment Plan also
authorizes Salomon Smith Barney to apply cash held in the share holder's Salomon
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 Salomon Smith Barney Financial
Consultant.
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan 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 Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class A shares of another Smith Barney Mutual Fund that is 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
Citigroup; (f) direct rollovers by plan participants of distributions from a
401(k) plan offered to employees of Citigroup or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent investments
will be subject to the applicable sales charge); (g) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; (h)
investments of distributions from a UIT sponsored by Salomon Smith Barney; and
(i) purchases by investors participating in a Salomon Smith Barney fee-based
arrangement. 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 other Smith Barney Mutual Funds that 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.
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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant
or the Transfer Agent to obtain a Letter of Intent application.
33
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total of $15,000,000 of Class Y shares of the Fund within 13 months
from the date of the Letter. If a total investment of $15,000,000 is not made
within the 13 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 Salomon Smith Barney
Financial Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares -- Smith Barney 401(k) and ExecChoice(TM)
Programs."
Year Since Purchase
Payment Was Made CDSC
================================================================================
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
34
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of
35
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k)
Program or the Smith Barney ExecChoice(TM) 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.
The Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class L shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class L 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 the 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 L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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(TM) Program, a
Participating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Salomon
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 Participa-
36
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
ting 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 a
Participating Plan's total Class L 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
L shares for Class A shares of the Fund. Such Plans will be notified in writing
within 30 days after the last business day of the calendar year and, unless the
exchange offer has been rejected in writing, the exchange will occur on or about
the last business day of the following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class L shares for Class A shares of the 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(TM) 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 L shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class L shares not converted will continue to be subject
to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must
purchase such shares directly from First Data. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class L shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made.
37
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed -- Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income 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
38
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global 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 and Class B shares of the Fund.
** Available for exchange with Class A, Class L and Class Y shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing in
Class L shares may exchange Fund shares for Class L shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a 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.
39
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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. MMC may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. 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
40
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 Salomon Smith Barney, or if the shareholder's account
is not with Salomon 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or
by submitting a written request for redemption to:
Smith Barney High Income Fund
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-51288
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 appearing on a share certificate, stock power or written redemption
request in excess of $10,000, 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 $10,000 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 corpora-
41
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
tions, executors, administrators, trustees or guardians. A redemption request
will not be deemed properly received until First Data receives all required
documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Salomon Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with 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 the applicant's 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 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent 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
42
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
from which shares were redeemed. In order to change the bank account designated
to receive redemption proceeds, a shareholder must complete a new Telephone/
Wire Authorization Form and, for the protection of the shareholder's assets,
will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day on which the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are processed at the net asset
value next determined.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the 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 advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This
43
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
income is "annualized" by assuming the amount of income is generated each month
over a one-year period and is compounded semi-annually. The annualized income is
then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to the
Trust and the Fund, including agreements with the Fund's distributor, investment
adviser and administrator, custodian and transfer agent. The day-to-day
operations of the Fund
44
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
are delegated to the Fund's investment adviser and administrator. The Statement
of Additional Information contains background information regarding each Trustee
and executive officer of the Trust.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC (through its predecessor entities) has been
in the investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. Under an
investment advisory agreement, the Fund pays MMC a fee at the annual rate of
0.50% of the value of the Fund's average daily net assets. For the fiscal year
ended July 31, 1998, the Fund paid investment advisory fees to MMC in an amount
equal to 0.50% of the value of its average daily net assets. This fee is
computed daily and paid monthly.
PORTFOLIO MANAGEMENT
John C. Bianchi, a Managing Director of Salomon Smith Barney, has served
as Investment Officer of the Fund since 1988 and is responsible for managing its
day-to-day operations, including the making of investment decisions.
Management's discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 is
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, MMC is paid a fee at the annual rate of 0.20% of the Fund's average daily
net assets. This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other
laws and regulations. MMC does not believe that its compliance with the
applicable laws
will
45
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
have a material adverse effect on its ability to continue to provide the Fund
with the same level of investment advisory services that it currently receives.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. 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"), Salomon Smith Barney is paid an annual service fee with respect to
Class A, Class B and Class L shares of the Fund at the annual rate of 0.25% of
the average daily net assets of the respective Class. Salomon Smith Barney is
also paid an annual distribution fee with respect to Class B and Class L shares
at the annual rate of 0.50% and 0.45%, respectively, of the average daily net
assets attributable to those Classes. Class B shares which automatically convert
to Class A shares eight years after the date of original purchase will no longer
be subject to distribution fees. The fees are used by Salomon Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class L 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 Salomon 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
Salomon Smith Barney associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and Class
L shares, a continuing fee for servicing shareholder accounts for as long as a
share holder remains a holder of that Class. Salomon 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 Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon Smith Barney, amounts received under the
Plan and proceeds of the CDSC.
46
<PAGE>
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Trust was organized on March 12, 1985, under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest
of
separate series having a $.001 per share par value. When matters are submitted
for shareholder vote, shareholders of each Class will have one vote for each
full share owned and a proportionate, fractional vote for any fractional share
held of that Class. 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 Salomon Smith
Barney Financial Consultants or the Fund's Transfer Agent.
47
<PAGE>
Salomon Smith Barney
----------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
High
Income
Fund
388 Greenwich Street
New York, New York 10013
FD0220 11/98
PROSPECTUS
SMITH BARNEY
High
Income
Fund
Class Z Shares Only
November 27, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(Registered)
<PAGE>
- --------------------------------------------------------------------------------
Prospectus November 27, 1998
- --------------------------------------------------------------------------------
Smith Barney High Income Fund -- Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney High Income Fund (the "Fund") is a diversified fund that
seeks to provide shareholders with high current income by investing in
high-yielding corporate bonds, debentures and notes.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.
The Funds invests primarily in lower-rated bonds, commonly known as "junk
bonds." Bonds of this type are subject to a greater risk of loss of principal
and interest. Purchasers should carefully assess the risks associated with an
investment in the Fund. See "Risk Factors and Special Considerations."
This Prospectus sets forth concisely certain information about the Fund
and the Trust, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this
Prospectus carefully and retain it for future reference.
The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") or any of its affiliates ("Qualified Plans") and to certain unit
investment trusts sponsored by Salomon Smith Barney or any of its affiliates
("Salomon Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 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 Salomon Smith Barney Financial Consultant. The
Statement of Additional Infor mation has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
The Fund's Expenses 3
- --------------------------------------------------------------------------------
Financial Highlights 4
- --------------------------------------------------------------------------------
Investment Objective and Policies 5
- --------------------------------------------------------------------------------
Valuation of Shares 17
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 18
- --------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares 19
- --------------------------------------------------------------------------------
Performance 20
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 21
- --------------------------------------------------------------------------------
Additional Information 23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Expenses
- --------------------------------------------------------------------------------
The following expense table lists the costs and expenses that an investor
will incur either directly or indirectly as a shareholder of Class Z shares of
the Fund, based upon the Fund's operating expenses for its most recent fiscal
year:
Annual Fund Operating Expenses
(as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.70%
Other expenses 0.15%
================================================================================
TOTAL FUND OPERATING EXPENSES 0.85%
================================================================================
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and the Fund."
1 year 3 years 5 years 10 years
================================================================================
An investor would pay the following
expenses on a $1,000 investment in
Class Z shares of the Fund, assuming
(1) 5.00% annual return and (2)
redemption at the end of each time period: $9 $27 $47 $105
================================================================================
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
3
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMGPeat Marwick LLP, independent auditors and
appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set forth below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1998 Annual Report, which is incorporated by reference into
the Statement of Additional Information.
For a Class Z share of beneficial interest outstanding throughout each year
<TABLE>
<CAPTION>
Smith Barney High Income Fund --
Year Ended July 31, 1998(1) 1997(1) 1996 1995(2) 1994 1993(3)
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $11.80 $10.99 $11.09 $11.16 $12.01 $11.03
- ------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 1.04 1.12 1.11 1.11 1.10 0.79
Net realized and unrealized
gain (loss) on investments 0.01 0.80 (0.10) (0.03) (0.80) 1.07
- ------------------------------------------------------------------------------------------------------------------------
Total Income from Operations 1.05 1.92 1.01 1.08 0.30 1.86
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.11) (1.11) (1.11) (1.08) (1.15) (0.88)
Capital -- -- -- (0.07) -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.11) (1.11) (1.11) (1.15) (1.15) (0.88)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.74 $11.80 $10.99 $11.09 $11.16 $12.01
- ------------------------------------------------------------------------------------------------------------------------
Total Return 9.33% 18.29% 9.42% 10.55% 2.37% 17.47%++
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000's) $107 $104 $7,158 $9,917 $11,370 $26,112
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.85% 0.75% 0.77% 0.86% 0.77% 0.81%+
Net investment income 8.82 9.88 9.98 10.28 9.61 9.88+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 78% 72% 60% 98% 95%
========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
4
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is high current income. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective. Although growth of capital is not an
investment objective of the Fund, Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) may consider potential for
growth as one factor, among others, in selecting investments for the Fund. The
Fund will seek high current income by investing, under normal circumstances, at
least 65% of its assets in high-yielding corporate bonds, debentures and notes
denominated in U.S. dollars or foreign currencies. Up to 40% of the Fund's
assets may be invested in fixed-income obligations of foreign issuers, and up to
20% of its assets may be invested in common stock or other equity or
equity-related securities, including convertible securities, preferred stock,
warrants and rights. Securities purchased by the Fund generally will be rated in
the lower rating categories of recognized rating agencies, as low as Caa by
Moody's Investors Service, Inc. ("Moody's") or D by Standard & Poor's Ratings
Group ("S&P") or an equivalent rating by any nationally recognized statistical
rating organization ("NRSRO"), or unrated securities that MMC deems of
comparable quality. However, the Fund will not purchase securities rated lower
than B by both Moody's and S&P unless, immedi ately after such purchase, no more
than 10% of its total assets are invested in such securities.The Fund may hold
securities with higher ratings when the yield differ ential between low-rated
and higher-rated securities narrows and the risk of loss may be reduced
substantially with only a relatively small reduction in yield. The Fund may also
invest in zero coupon bonds and payment-in-kind bonds. The Fund also may invest
in higher-rated securities when MMC believes that a more defen sive investment
strategy is appropriate in light of market or economic conditions. The Fund also
may lend its portfolio securities, purchase or sell securities on a when-issued
or delayed-delivery basis and write covered call options on securities. In order
to mitigate the effects of uncertainty in future exchange rates, the Fund may
engage in currency exchange transactions and purchase options on foreign
currencies. The Fund also may hedge against the effects of changes in the value
of its investments by purchasing put and call options on interest rate futures
contracts. Special considerations associated with the Fund's investments are
described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Covered Option Writing. The Fund may write (sell) call options on
securities.
5
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A call option embodies the right of its purchaser to
compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a call option written by the Fund has the right to purchase from
the Fund the underlying security owned by the Fund at the agreed-upon price for
a specified time period.
Upon the exercise of a call option written by the Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option.
The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit
or to unfreeze an underlying security (thereby permitting its sale or the
writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.
Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases,
6
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
the prices of the convertible securities tend to rise as a reflection of the
value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
ADDITIONAL INVESTMENTS
Money Market Instruments. When MMC believes that market conditions
warrant, the Fund may adopt a temporary defensive posture and may invest in
short-term instruments without limitation. Short-term instruments in which the
Fund may invest include: United States government securities; certain bank
7
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent rating by any 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.
U. S. Government Securities. United States government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). The U.S. government securities
in which the Fund may invest include: direct obligations of the United States
Treasury (such as Treasury Bills, Treasury Notes and Treasury Bonds) and
obligations issued by U.S. government agencies and instrumentalities, including
securities that are supported by the full faith and credit of the United States
(such as Government National Mortgage Association ("GNMA") certificates);
securities that are supported by the right of the issuer to borrow from the
United States Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than ten 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.
Zero Coupon Bonds. 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
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list
8
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
of reporting dealers. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying debt obligation for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays in or restrictions upon the Fund's ability to dispose
of the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the agreement. MMC,
acting under the supervision of the Trust's Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
banks and dealers with which the Fund may enter into repurchase agreements to
evaluate potential risks.
Futures Contracts and Options on Futures Contracts. When deemed advisable
by MMC, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities due to anticipated changes in
interest rates, currency values and market conditions and when the transactions
are economically appropriate to the reduction of risks inherent in the
management of the Fund. The Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premiums paid for
unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission) exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash, U.S.
government securities, equity securities or debt securities of any grade,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees ("eligible segregated assets"), plus accrued profits held in a
segregated account.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be
9
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist for a
particular contract or option at any particular time. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts and Global Depositary Receipts 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 depositary's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligation and the depositary'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 or may not be as reliable for an unsponsored ADR as it is
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
for a sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrrangements.
Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock. The Fund's investments in each of equipment
leases or equipment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the Fund
may engage in currency exchange transactions and purchase exchange-traded put
and call options on foreign currencies. The Fund will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The Fund's dealings in forward currency exchange
and options on foreign currencies are limited to hedging involving either
specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase put options on a foreign currency in which
securities held by the Fund are denominated to protect against a decline in the
value of the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
currency at a specified price during the term of the option. Although the
purchase of an option on a foreign currency may constitute an effective hedge by
the Fund against fluctuations in the exchange rates, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies
purchased by the Fund may be traded on domestic and foreign exchanges or traded
over-the-counter.
Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell any portfolio securities on a when-issued or delayed-delivery basis. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage. In such transactions
delivery of the securities occurs beyond the normal settlement periods, but no
payment or delivery is made by the Fund prior to the actual delivery or payment
by the other party to the transaction. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually delivered
to the buyers. The Fund will establish a segregated account consisting of cash,
U.S. government securities, equity securities or debt securities of any grade
having a value equal to or greater than the Fund's purchase commitments,
provided such securities have been determined by MMC 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. The Fund will not accrue
income with respect to a when-issued security prior to its stated delivery date.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities that are maintained at all times in an amount at least equal to the
current market value of the loaned securities.
Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
result, the Fund may be forced to sell these securities at less than fair market
value or may not be able to sell them when MMC believes it desirable to do so.
The Fund's investments in illiquid securities are subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of its value, the value
of the Fund's net assets could be adversely affected.
Securities of Developing Countries. A developing country generally is
consid ered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calendar days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended ("the 1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers which have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in con nec tion with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Trust's
Board of Trustees. A complete list of investment restrictions that identifies
additional restrictions that cannot be changed without the approval of the
majority of the Fund's outstanding shares is contained in the Statement of
Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
by a loss on the hedge position. The Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by MMC.
Successful use by the Fund of options will depend on MMC's ability to correctly
predict movements in the direction of the stock underlying the option used as a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.
Medium-, Low- and Unrated Securities. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher current yield than the yield
offered by higher-rated securities, but involve greater volatility of price and
risk of loss of income and principal, including the probability of future
default or bankruptcy of the issuers of such securities. Medium- and low-rated
and comparable unrated securities will likely have large uncertainties or major
risk exposures to adverse conditions and are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held by the Fund, with a commensurate effect on the value of the
Fund's shares.
The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for certain medium- and low-rated and comparable unrated
securities has not fully weathered a major economic recession. Any such economic
downturn could adversely affect the value of such securities and the ability of
the issuers of these securities to repay principal and pay interest thereon.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P or an equivalent
rating by any NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of the desirable investment and assurance of interest and
principal payments over any long period of time may be small. Securities which
are rated Caa or CCC or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
Securities rated C by Moody's and D by S&P are in the lowest rating class and
indicate that payments are in default or that a bankruptcy petition has been
filed with respect to the issuer or that the issuer is regarded as having
extremely poor prospects. See the Appendix in the Trust's Statement of
Additional Information on bond ratings by Moody's and S&P.
In light of these risks, MMC, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Rule 144A Securities. The Fund may purchase Rule 144A Securities, which
are unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.
Real Estate Investment Trusts. The Fund may purchase real estate invest
ment trusts ("REITs"). REITs are investment vehicles that invest primarily in
either real estate or real estate loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or security mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs and the management skill of the REIT's
manager. REITs are also subject to risks generally associated with investments
in real estate.
Asset-Backed Securities. The Fund may invest in asset-backed securities
("ABSs"). An ABS 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 credit worthiness 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 the ABS, as will the exhaustion of any
credit enhancement. The risks of investing in ABSs ultimately will depend upon
the payment of the consumer loans by the individual borrowers. In its capacity
as purchaser of the ABS, the Fund will generally have no recourse to the entity
that originated the loans in the event of default by the borrower. In addition,
the loans underlying the ABSs are subject to prepayments, which may shorten the
weighted average life of such securities and may lower their return.
Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
prepare for the year 2000 and expect that their systems will be compliant before
that date. In addition, MMC has been advised by the Fund's custodian, transfer
agent, distributor and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that MMC, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on behalf of the
Fund are placed by MMC with broker-dealers that MMC selects, including Salomon
Smith Barney. The Fund may utilize Salomon Smith Barney or a Salomon Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when MMC believes that the broker's charge for the transactions does not exceed
usual and customary levels. The same standard applies to the use of Salomon
Smith Barney as a commodities broker in connection with entering into options
and futures contracts.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on
each day that the NYSE is open by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Trust's Board of
17
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
Trustees or delegates. A security that is traded primarily on an exchange is
valued at the last sale price on that exchange or, if there were no sales during
the day, at the current quoted bid price. Over-the-counter securities are valued
on the basis of the bid price at the close of business on each day. Investments
in U.S. government securities (other than short-term securities) are valued at
the average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trust's Board of Trustees determines that amortized cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer price.
Further information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and distributions
will be reinvested automatically in additional shares of the same Class at net
asset value, subject to no sales charge or CDSC. Dividends from net investment
income, if any, of the Fund will be declared monthly and paid on the last Friday
of the month. The Fund's final distribution for each calendar year will include
any remaining net investment income and net realized long- and short-term
capital gains realized during the year and deemed undistributed during the year
for Federal income tax purposes. In order to avoid the application of a 4%
nondeductible excise tax measured with respect to certain undistributed amounts
of ordinary income and capital gains, the Fund may make any additional
distributions shortly before December 31 in each year as may be necessary to
avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the require ments 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.
18
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. 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 invest ment 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.
Each shareholder will receive a statement annually from the Trust, which
will set forth separately the aggregate dollar amount of dividends and capital
gains distributed to the share holder by the Fund with respect to the prior
calendar year.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders are urged to consult their tax advisers regarding the
application of Federal, state and local tax laws to their specific situation
before investing in the Fund.
- --------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares
- --------------------------------------------------------------------------------
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Solomon Smith Barney UIT. Purchases are effected at
the net asset value next determined after a purchase order is received by
Salomon Smith Barney (the "trade date"). Payment is due to Salomon Smith Barney
on the third business day (the "settlement date") after the trade date.
Investors who make payment prior to the settlement date may designate a
temporary investment (such as a money market fund of the Smith Barney Mutual
Funds) for such payment until settlement date. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares for a period of
time. There are no minimum investment requirements for Class Z shares; however,
the Fund reserves the right
19
<PAGE>
- --------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares (continued)
- --------------------------------------------------------------------------------
to vary this policy at any time.
Purchase orders received by the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, currently 4:00 p.m. (Eastern time), on any
day that the Fund's net asset value is calculated, are priced according to the
net asset value determined on that day. See "Valuation of Shares." Certificates
for Fund shares are issued upon request to the Trust's transfer agent.
Qualified Plans may redeem their shares on any day the Fund calculates its
net asset value. See "Valuation of Shares." Redemption requests received in
proper form prior to the close of regular trading on the NYSE are priced at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
as next determined. Shareholders acquiring Class Z shares through a Qualified
Plan or a Salomon Smith Barney UIT should consult the terms of their respective
plans for redemption provisions.
Holders of Class Z shares should consult their Qualified Plans for
information about available exchange options.
- --------------------------------------------------------------------------------
Peformance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in Class Z
shares over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Class Z shares during
the period by the maximum public offering price per share on the last day of the
period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements.
These figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming deduction of the maximum sales charge, if any, from the initial amount
invested and reinvestment of all income dividends and capital gain distributions
on the reinvestment dates at prices calculated as stated in this Prospectus,
then dividing the value of the investment at the end of the period so calculated
by the initial amount invested and subtracting 100%. The standard average annual
total return, as pre-
20
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
scribed by the SEC, is derived from this total return, which provides the ending
redeemable value. Such standard total return information may also be accompanied
with nonstandard total return information for differing periods computed in the
same manner but without annualizing the total return or taking sales charges
into account. The Fund calculates current dividend return by annualizing the
most recent monthly distribution and dividing by the net asset value on the last
day of the period for which current dividend return is presented. The current
dividend return for Class Z shares may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing the
Class Z share's current return to yields published for other investment
companies and other investment vehicles. The Fund may also include comparative
performance information in advertising or marketing the Class Z shares. Such
performance information may include data from Lipper Analytical Services, Inc.
and other financial publications.
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust and the Fund, including agreements with its distributor, investment
adviser and administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser and
administrator. The Statement of Additional Information contains background
information regarding the Trustees and executive officers of the Trust.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad range of
financial services -- asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading -- and use
diverse channels to make them available to consumer and corporate customers
around the world. Among these businesses are Citibank, Commercial Credit,
Primerica Financial Services, Salomon Smith Barney, SSBC Asset Management,
Travelers Life & Annuity, and Travelers Property Casualty. MMC (through its
predecessor entities) has been in the investment counseling business since 1934
and
21
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
is a registered investment adviser. MMC renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1998 in
excess of $108 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered to the Fund, the Fund pays MMC a fee at the annual
rate of 0.50% of the value of the Fund's average daily net assets. This fee is
computed daily and paid monthly.
PORTFOLIO MANAGEMENT
John C. Bianchi, a Managing Director of Salomon Smith Barney, has served
as Vice President and Investment Officer of the Fund since 1988 and is
responsible for managing its day-to-day operations, including the making of
investment decisions.
Management's discussion and analysis, and additional performance informa
tion regarding the Fund during the fiscal year ended July 31, 1998, is included
in the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, MMC is paid a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other
laws and regulations. MMC does not believe that its compliance with the
applicable laws will have a material adverse effect on its ability to continue
to provide the Fund with the same level of investment advisory services that it
currently receives.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, serves as
the Fund's distributor.
22
<PAGE>
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Trust was organized on March 12, 1985, in the Commonwealth of
Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series having
a $.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes: A, B, L, Y and Z. When matters are
submitted for shareholder vote, shareholders of each Class of the Fund will have
one vote for each full share owned and a proportionate, fractional vote for any
fractional share held of that Class. 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 an identical pro rata interest in the
Fund's investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges, if any, for each Class; (c) the
distribution and/or service fees, if any, borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privileges of each Class; and (g) the
conversion feature of a Class of shares. The Trust's Board of Trustees does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes of shares of the Fund. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take
appropriate action.
The Trust does not hold annual shareholder meetings. There normally will
be no meeting of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Trust's investments.
First Data Investor Services Group, Inc., 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 listing of the investment securities held by
the Fund at the end of the reporting period. Shareholders may seek information
regarding the Fund from their Salomon Smith Barney Financial Consultant.
23
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Smith Barney
High
Income
Fund
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
FD0792 11/98
PROSPECTUS
SMITH BARNEY
Municipal
High Income
Fund
November 27, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(Registered)
<PAGE>
- --------------------------------------------------------------------------------
Prospectus November 27, 1998
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Municipal High Income Fund (the "Fund") is a diversified fund
that seeks to maximize current income exempt from Federal income taxes by
investing primarily in municipal bonds and notes. The Fund is one of a number of
funds, each having distinct investment objectives and policies, making up Smith
Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund
and the Trust, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference. Shares of other funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 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 Salomon 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.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 14
- --------------------------------------------------------------------------------
Municipal Securities 24
- --------------------------------------------------------------------------------
Valuation of Shares 25
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 25
- --------------------------------------------------------------------------------
Purchase of Shares 28
- --------------------------------------------------------------------------------
Exchange Privilege 35
- --------------------------------------------------------------------------------
Redemption of Shares 38
- --------------------------------------------------------------------------------
Minimum Account Size 40
- --------------------------------------------------------------------------------
Performance 40
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 42
- --------------------------------------------------------------------------------
Distributor 43
- --------------------------------------------------------------------------------
Additional Information 44
- --------------------------------------------------------------------------------
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.
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks maximum current income exempt from Federal income taxes by
investing primarily in intermediate- and long-term municipal bonds and notes
rated A, Baa or Ba by Moody's Investors Service, Inc. ("Moody's") or A, BBB or B
by Standard & Poor's Ratings Group ("S&P") or having an equivalent rating by any
nationally recognized statistical rating organization ("NRSRO").
Intermediate-term bonds have remaining maturities at the time of purchase of
between five and fifteen years. Long-term bonds have remaining maturities at the
time of purchase of between fifteen and thirty years. It is anticipated that the
average remaining maturity of bonds purchased by the Fund will be between three
and twenty-five years. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares 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 --
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after the date of purchase and by 1.00% each year thereafter to zero. This CDSC
may be waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50% of the average
daily net assets of the Class. The Class B shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L 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 $15,000,000. 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 a reduced sales charge and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class L 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, Class L shares which have a lower initial sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a
substantial sales charge discount and who have a short-term or undetermined time
frame.
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 L 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
L 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 will 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 offered with a sales charge held in
other Smith Barney Mutual Funds listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Purchase
of Shares."
Salomon Smith Barney Financial Consultants may receive different
compensation for selling different Classes of shares. Investors should
understand that the purpose of the CDSC on the Class B and Class L 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 among the Classes of
shares.
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney Inc. ("Salomon Smith Barney").
(An investment dealer in the selling group and a broker that clears securities
through Salomon Smith Barney are collectively referred to as "Dealer
Representatives.") In addition, certain investors, including qualified
retirement plans and investors purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investors Services Group, Inc. ("First Data" or the
"Transfer Agent"). See "Purchase of Shares."
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. The minimum investment requirements for purchases of Portfolio shares
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 Salomon Smith Barney. It is not
recommended that the Fund be used as a vehicle for Keogh, IRA or other qualified
retirement plans. 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 L shares and the minimum 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 Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial services
- -- asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life
& Annuity, and Travelers Property Casualty. See "Management of the Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values, next determined. 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
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
available from Salomon Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. General changes in interest rates will
result in increases or decreases in the market value of the obligations held by
the Fund. The Fund may invest up to 50% of its assets in obligations rated Ba or
below by Moody's or BB or below by S&P or having an equivalent rating by any
NRSRO or in nonrated securities deemed by MMC to be of comparable quality,
commonly known as "junk bonds." In addition, the Fund may invest in obligations
rated as low as Caa by Moody's or CCC by S&P or having an equivalent rating by
any NRSRO. Securities that are rated B generally lack characteristics of the
desirable investment and assurance of interest and principal payments over any
long period of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements of danger may
exist with respect to principal or interest. Although medium- or low-rated
securities of the type in which the Fund may invest offer a higher current yield
than the yield offered by higher rated securities, they involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities (a) will likely have
some quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties of major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The Fund has the right to invest its net assets in
state and local obligations that are "private activity bonds," the income for
which may be taxable as a specific preference item for purposes of the Federal
alternative minimum tax. Certain of the investments held by the Fund and certain
of the investment strategies that the Fund may employ might expose it to certain
risks. See "Investment Objective and Management Policies -- Certain Portfolio
Strategies."
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's operating
expenses for its most recent fiscal year:
Smith Barney Municipal High Income Fund Class A Class B Class L* Class Y
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 4.00% None 1.00% None
Maximum CDSC
(as a percentage of original
cost or redemption proceeds
whichever is lower) None** 4.50% 1.00% None
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average
net assets)
Management fees 0.60% 0.60% 0.60% 0.60%
12b-1 fees*** 0.15% 0.65% 0.70% None
Other expenses**** 0.08% 0.07% 0.12% 0.09%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses 0.83% 1.32% 1.42% 0.69%
================================================================================
* Class C shares were renamed Class L shares effective June 12, 1998.
** 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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. (the
"NASD").
**** For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because as of July 31, 1998, no Class Y shares
were outstanding.
Class A shares of the Portfolio purchased through the Salomon 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 Salomon 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 L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Salomon
Smith Barney receives an annual 12b-1 service fee of 0.15% of the value of
average daily net assets of Class A shares. Salomon Smith Barney also receives,
with respect to Class B shares, an annual 12b-1 fee of 0.65% of the value of
average daily net assets of that Class, consisting of a 0.50% distribution fee
and a 0.15% service fee. For Class L shares, Salomon Smith Barney receives an
annual 12b-1 fee of 0.70%
8
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
of the value of average daily net assets, consisting of a 0.55% distribution fee
and a 0.15% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
Example The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares", "Redemption of Shares" and
"Management of the Trust and the Fund."
Smith Barney Municipal High Income Fund 1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
Class A $48 $65 $84 $138
Class B 58 72 82 146
Class L 34 54 87 178
Class Y 7 22 38 86
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
Class A $48 $65 $84 $138
Class B 13 42 72 146
Class L 24 54 87 178
Class Y 7 22 38 86
================================================================================
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's Annual Report, which is incorporated by
reference into the Statement of Additional Information. No information is
presented for Class Y shares, because no Class Y shares were outstanding for the
periods shown.
For a Class A share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31, 1998 1997 1996 1995 1994 1993(1)
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.07 $ 17.31 $ 17.25 $ 17.26 $ 18.24 $ 17.45
- ----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.95 0.97 1.00 1.04 1.06 0.78
Net realized and unrealized gain
(loss) on investments 0.19 0.77 0.06 0.01(2) (0.85) 1.00
- ----------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.14 1.74 1.06 1.05 0.21 1.78
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.98) (0.98) (1.00) (1.00) (1.06) (0.83)
Net realized gains (0.27) -- -- (0.02) (0.13) (0.16)
Capital -- -- -- (0.04) -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.25) (0.98) (1.00) (1.06) (1.19) (0.99)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.96 $ 18.07 $ 17.31 $ 17.25 $ 17.26 $ 18.24
- ----------------------------------------------------------------------------------------------------------------------
Total Return 6.54% 10.40% 6.28% 6.42% 1.14% 10.24%++
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 268 $ 254 $ 232 $ 238 $ 18 $ 14
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.83% 0.83% 0.84% 0.84% 0.84% 0.86%+
Net investment income 5.24 5.52 5.74 6.04 5.83 6.03+
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 84% 51% 44% 38% 39% 34%
======================================================================================================================
</TABLE>
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
(2) Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values
less than the beginning of the period.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31, 1998 1997 1996 1995 1994 1993
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 18.09 $ 17.32 $ 17.26 $ 17.26 $ 18.24 $ 18.00
- -------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.86 0.89 0.92 0.95 0.96 0.98
Net realized and unrealized
gain (loss) on investments 0.19 0.77 0.06 0.02(1) (0.85) 0.45
- -------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.05 1.66 0.98 0.97 0.11 1.43
- -------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.89) (0.89) (0.92) (0.91) (0.96) (1.02)
Net realized gains (0.27) -- -- (0.02) (0.13) (0.17)
Capital -- -- -- (0.04) -- --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions (1.16) (0.89) (0.92) (0.97) (1.09) (1.19)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.98 $ 18.09 $ 17.32 $ 17.26 $ 17.26 $ 18.24
- -------------------------------------------------------------------------------------------------------------------
Total Return 6.01% 9.89% 5.74% 5.91% 0.60% 8.28%
- -------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 471 $ 562 $ 653 $ 737 $ 1,069 $ 1,108
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.32% 1.32% 1.33% 1.35% 1.33% 1.38%
Net investment income 4.75 5.04 5.23 5.61 5.34 5.52
- -------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 84% 51% 44% 38% 39% 34%
===================================================================================================================
</TABLE>
(1) Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values
less than the net asset value at the beginning of the period.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31, 1992 1991 1990 1989
===========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.97 $ 16.98 $ 17.31 $ 16.44
- -------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 1.04 1.10 1.12 1.13
Net realized and unrealized gain (loss)
on investments 1.17 0.10 (0.30) 0.88
- -------------------------------------------------------------------------------------------
Total Income From Operations 2.21 1.20 0.82 2.01
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.04) (1.10) (1.12) (1.13)
Net realized gains (0.14) (0.11) (0.03) (0.01)
- -------------------------------------------------------------------------------------------
Total Distributions (1.18) (1.21) (1.15) (1.14)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 18.00 $ 16.97 $ 16.98 $ 17.31
- -------------------------------------------------------------------------------------------
Total Return 13.50% 7.40% 4.95% 12.68%
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 871 $ 639 $ 574 $ 558
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.45%# 1.45% 1.47% 1.44%
Net investment income 5.96 6.48 6.57 6.70
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 61% 44% 29% 21%
===========================================================================================
</TABLE>
# The annualized operating expense ratio excludes interest expense. The
annualized operating expense ratio including interest expense was 1.48%
for the year ended July 31, 1992.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class L(1) share of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31, 1998 1997 1996 1995(2)
=========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.07 $ 17.31 $ 17.25 $ 15.83
- -----------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.87 0.88 0.89 0.60
Net realized and unrealized
gain on investments 0.16 0.77 0.08 1.50(3)
- -----------------------------------------------------------------------------------------
Total Income From Operations 1.03 1.65 0.97 2.10
- -----------------------------------------------------------------------------------------
Less Distributions:
Net investment income (0.88) (0.89) (0.91) (0.62)
Net realized gains (0.27) -- -- (0.02)
Capital -- -- -- (0.04)
- -----------------------------------------------------------------------------------------
Total Distributions (1.15) (0.89) (0.91) (0.68)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.95 $ 18.07 $ 17.31 $ 17.25
- -----------------------------------------------------------------------------------------
Total Return 5.91% 9.79% 5.69 13.45%++
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 1,869 $ 752 $ 546 $ 211
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.42% 1.40% 1.39% 1.18%+
Net investment income 4.64 4.94 5.18 5.56+
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 84% 51% 44% 38%
=========================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the period from November 17, 1994 (inception date) to July 31, 1995.
(3) Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values
less than the net asset value at the beginning of the period.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is the maximization of current income
exempt from Federal income taxes. Under normal market conditions, the Fund will
invest at least 80% of its net assets in (a) "Municipal Bonds," which generally
are intermediate- and long-term debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities and (b) Municipal Leases, which generally are
participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Under normal market conditions, the Fund's assets will be
invested primarily in Municipal Bonds and municipal leases (collectively,
"Municipal Securities") rated A, Baa or Ba by Moody's, or A, BBB or BB by S&P,
or having an equivalent rating by any NRSRO, or in unrated Municipal Securities
that are deemed to be of comparable quality by MMC. Up to 50% of the Fund's
assets may be invested in Municipal Securities rated Ba or below by Moody's or
BB or below by S&P or having an equivalent rating by any NRSRO or, if unrated,
judged by MMC, to be of comparable quality. The Fund's investment objective may
be changed only with the approval of the holders of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective.
The Fund may invest without limit in "municipal leases," which generally
are participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Municipal leases may take the form of a lease or an
installment purchase contract issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in municipal lease obligations. In evaluating municipal lease
obligations, MMC will consider such factors as it deems appropriate, which may
include: (a) whether the lease can be canceled; (b) the ability of the lease
obligee to direct the sale of the underlying assets; (c) the general
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
creditworthiness of the lease obligor; (d) the likelihood that the municipality
will discontinue appropriating funding for the leased property in the event such
property is no longer considered essential by the municipality; (e) the legal
recourse of the lease obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services rather than those covered by
the lease obligation.
Under normal circumstances, the Fund may invest in "private activity
bonds." Interest income on certain types of private activity bonds issued after
August 7, 1986 to finance nongovernmental activities is a specific tax
preference item for purposes of Federal individual and corporate alternative
minimum taxes. Individual and corporate shareholders may be subject to a Federal
alternative minimum tax to the extent that the Fund's dividends are derived from
interest on these bonds. These private activity bonds are included in the term
"Municipal Securities" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all Municipal
Securities are a component of the "adjusted current earnings" item for purposes
of the Federal corporate alternative minimum tax.
The Fund may invest in short-term obligations ("Temporary Investments"),
some of which may not be tax-exempt. Included among the Temporary Investments
are tax-exempt notes rated within the four highest grades by any NRSRO,
including Moody's or S&P; tax-exempt commercial paper rated no lower than A-2 by
S&P or Prime-2 by Moody's; and taxable money market instruments. At no time will
more than 20% of the Fund's assets be invested in Temporary Investments unless
MMC temporarily has adopted a defensive investment posture. In addition, the
Fund may enter into municipal bond index futures contracts and options on
interest rate futures contracts for hedging purposes. The Fund also may acquire
variable rate demand notes, purchase securities on a when-issued basis and enter
into stand-by commitments with respect to portfolio securities.
ADDITIONAL INVESTMENTS
Money Market Instruments. Under normal conditions, the Fund may invest up
to 20% of its assets in Temporary Investments, including taxable money market
instruments. In addition, when MMC believes that market conditions warrant, the
Fund may invest in Temporary Investments without limitation for defensive
purposes. Short-term instruments in which the Fund may invest include
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"), certain bank obligations
including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than Prime-2 by Moody's or A-2 by
S&P or the equivalent rating
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 with respect to the securities in which the Fund may invest. The Fund
will invest in obligations of a foreign bank or foreign branch of a domestic
bank only if MMC determines that the obligations present minimum credit risks.
These obligations may be traded in the United States or outside the United
States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the
Fund may invest include direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States; securities that are
supported by the right of the issuer to borrow from the United States Treasury;
and securities that are supported by the credit of the instrumentality. Treasury
Bills have maturities of less than one year, Treasury Notes have maturities of
one to 10 years and Treasury Bonds generally have maturities of greater than 10
years at the date of issuance. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
Zero Coupon Bonds. 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
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund may enter into repurchase agreements to evaluate potential risks.
Investments by the Fund in repurchase agreements, if any, may be limited by the
restrictions on the Fund's investment in taxable investments.
When-Issued, Delayed Delivery, and Forward Commitment Transactions. The
Fund may purchase or sell securities on a when-issued, delayed delivery or
forward commitment basis. These transactions involve a commitment by the Fund to
purchase or sell securities for a predetermined price or yield, with payment or
delivery taking place more than seven days in the future, or after a period
longer than the customary settlement period for that type of security. The Fund
will establish a segregated account with the Trust's custodian, PNC Bank,
National Association ("PNC Bank") consisting of cash, U.S. government
securities, equity securities or debt securities of any grade having a value
equal to or greater than the Fund's purchase commitments provided that such
securities have been determined by MMC 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 asset value per share. Typically, no income
accrues on securities a Fund has committed to purchase prior to the time
delivery of the securities is made, although the Fund may earn income on
securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund
is not required to pay for the security until the delivery date, these risks are
in addition to the risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when when-issued, delayed
delivery or
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
forward commitment purchases are outstanding, the purchases may result in a form
of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or
forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may close out of or
renegotiate a transaction after it is entered into, and may sell when-issued or
forward commitment securities before they are delivered, which may result in a
capital gain or loss. Purchasing these securities can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
Futures Contracts and Options on Futures Contracts. A municipal bond index
futures contract of the type in which the Fund may trade is based on an index of
long-term, tax-exempt municipal bonds. The contract is an agreement under which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. An option on an interest rate futures contract, as contrasted with the
direct investment in a futures contract, gives the purchaser the right, in
return for the premium paid, to assume a position in an interest rate futures
contract at a specified exercise price at any time prior to the expiration date
of the option. A call option gives the purchaser of the option the right to
enter into a futures contract to buy and obliges the writer to enter into a
futures contract to sell the underlying debt securities. A put option gives the
purchaser the right to sell and obliges the writer to buy the underlying
contract. The Fund may purchase put options on interest rate futures contracts
to hedge its portfolio securities against the risk of rising interest rates, and
may purchase call options on interest rate futures contracts to hedge against a
decline in interest rates. The Fund may write put and call options on interest
rate futures contracts in entering into closing sale transactions and to
increase ability to hedge against changes in interest rates. The Fund will write
put and call options only on interest rate futures contracts that are traded on
a domestic exchange or board of trade.
Variable-Rate Demand Notes. Municipal Securities purchased by the Fund may
include variable-rate demand notes issued by industrial development authorities
and other governmental entities. Although variable-rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by the
Fund will be determined by MMC to be of comparable quality at the time of
purchase to instruments rated "high quality" (that is, within the two highest
ratings) by any NRSRO. In addition, while no active secondary market may exist
with respect to a particular variable-rate demand note purchased by the Fund,
the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
third party. The absence of such an active secondary market, however, could make
it difficult for the Fund to dispose of the variable-rate demand note involved
in the event that the issuer of the note defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The Fund may pay for stand-by
commitments either separately in cash or by paying a higher price for the
securities acquired with the commitment, thus increasing the cost of the
securities and reducing the yield otherwise available for them. The Fund intends
to enter into stand-by commitments only with brokers, dealers and banks that, in
the view of MMC, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, MMC will periodically
review relevant financial information concerning the issuer's assets,
liabilities and contingent claims. The Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.
CERTAIN INVESTMENT GUIDELINES
The Fund may invest up to 10% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) futures contracts and options on them and certain variable
rate demand notes, to the extent that a liquid secondary market does not exist
for these instruments. In addition, the Fund may invest up to 5% of its assets
in the securities of issuers that have been in continuous operation for less
than three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of a majority of
the Trust's Board of Trustees. A complete list of investment restrictions that
identifies additional restrictions that cannot be changed without the approval
of a majority of the Fund's outstanding shares is contained in the Statement of
Additional Information.
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
Municipal Securities. Even though Municipal Securities are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of Municipal
Securities with longer remaining maturities typically fluctuate more than those
of similarly rated Municipal Securities with shorter remaining maturities. The
values of fixed-income securities also may be affected by changes in the credit
rating or financial condition of the issuing entities.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest on them from Federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
MMC will review the proceedings relating to the issuance of Municipal Securities
or the basis for opinions of counsel. The Fund may invest without limit in debt
obligations that are repayable out of revenues generated from economically
related projects or facilities or debt obligations whose issuers are located in
the same state. Sizable investments in these obligations could involve an
increased risk to the Fund should any of such related projects or facilities
experience financial difficulties.
Municipal Leases. Municipal leases, like other municipal debt obligations,
are subject to the risk of non-payment. The ability of issuers of municipal
leases to make timely lease payments may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among Federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
leases might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
leases and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its right in the
event of a default in lease payments, the Fund may take possession of and manage
the assets securing the issuer's obligations on such securities, which may
increase the Fund's operating expenses and adversely affect the net asset value
of the Fund. Any income derived from the Fund's ownership or operation of such
assets may not be tax-exempt.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Securities and may enact other similar laws in the
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
future. If any such laws are enacted that would reduce the availability of
Municipal Securities for investment by the Fund so as to affect the Fund's
shareholders adversely, the Trustees will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to Fund shareholders for their consideration. If legislation were enacted that
would treat a type of Municipal Securities as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible taxable Temporary
Investment within the applicable limits set forth in this Prospectus.
Medium-, Low- and Unrated Securities. The Fund may invest in medium-or
low-rated securities commonly known as "junk bonds," and unrated securities of
comparable quality. Generally, these securities offer a higher current yield
than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities (a) will likely have
some quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. These types of factors could, in certain instances,
reduce the value of securities held by the Fund with a commensurate effect on
the value of the Fund's shares. Therefore, an investment in the Fund should not
be considered as a complete investment program and may not be appropriate for
all investors.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings. In addition, the markets in
which medium- and low-rated securities are traded are generally more limited
than those in which higher-rated securities are traded. The existence of limited
markets for these securities may restrict the availability of securities for the
Fund to
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
purchase and also may have the effect of limiting the ability of the Fund (a) to
obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The market for medium- and low-rated and comparable
unrated securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, could likely disrupt severely
the market for such securities, adversely affect the value of such securities
and also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P or an equivalent
rating by any NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities that are rated B generally lack
characteristics of the desirable investment, and assurance of interest and
principal payments over any long period of time may be small. Securities that
are rated Caa by Moody's or CCC by S&P are of poor standing. These issues may be
in default or present elements of danger may exist with respect to principal or
interest.
In light of the risks described above, MMC, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration. Those factors may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when MMC believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that the Fund deems representative of
their value, the value of the Fund's net assets could be adversely affected.
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Futures and Options on Futures. When deemed advisable by MMC, the Fund may
enter into futures contracts or related options that are traded on a domestic
exchange or board of trade. Such investments, if any, by the Fund will be made
solely for the purpose of hedging against the effects of changes in the value of
its portfolio securities due to anticipated changes in interest rates and market
conditions and when the transactions are economically appropriate to the
reduction of risks inherent in the management of the Fund. The Fund may not
enter into futures and options contracts for which aggregate initial margin
deposits and premiums paid for unexpired options to establish such positions
that are not bona fide hedging positions (as defined by the Commodity Futures
Trading Commission), exceed 5% of the fair market value of the Fund's assets
after taking into account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract always will be covered by cash and cash equivalents plus accrued
profits held in a segregated account.
The use of futures contracts and options on those contracts as a hedging
device involves several risks. No assurance can be given that a correlation will
exist between price movements in the underlying securities or index, on the one
hand, and price movements in the securities that are the subject of the hedge,
on the other hand. Positions in futures contracts and options on those contracts
may be closed out only on the exchange or board of trade on which they were
entered into, and no assurance can be given that an active market will exist for
a particular contract or option at any particular time. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance. Furthermore, because any interest earned from transactions in
municipal bond index futures contracts and options on interest rate futures
contracts will be taxable, it is anticipated that the Fund will invest in these
instruments only in unusual circumstances, such as when MMC anticipates an
extreme change in interest rates or market conditions.
Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent,
distributor and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
that MMC, Salomon Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
PORTFOLIO TRANSACTIONS
The Fund's portfolio securities are ordinarily purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be maintained.
Usually no brokerage commissions, as such, are paid by the Fund for
purchases and sales undertaken through principal transactions, although the
price paid usually includes an undisclosed compensation to the dealer acting as
agent. The prices paid to underwriters of newly issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers ordinarily are executed at a price between
the bid and asked price.
Transactions on behalf of the Fund are allocated to various dealers,
including Salomon Smith Barney and other affiliated brokers, by MMC in its best
judgment. The primary consideration is prompt and effective execution of orders
at the most favorable price. Subject to that primary consideration, dealers may
be selected for research, statistical or other services to enable MMC to
supplement its own research and analysis with the views and information of other
securities firms.
- --------------------------------------------------------------------------------
Municipal Securities
- --------------------------------------------------------------------------------
The term "Municipal Securities" generally is understood to include debt
obligations issued to obtain funds for various public purposes, the interest on
which qualifies, in the opinion of bond counsel to the issuer, as excluded from
gross income for Federal income tax purposes. In addition, Municipal Securities
may include "private activity bonds" if the proceeds from such bonds are used
for the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, and the interest paid on such bonds may be
excluded from gross income for Federal income tax purposes. Current Federal tax
laws place
24
<PAGE>
- --------------------------------------------------------------------------------
Municipal Securities (continued)
- --------------------------------------------------------------------------------
substantial limitations on the aggregate amount of such bonds that any given
state may issue.
CLASSIFICATIONS
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizeable investments in such obligations could involve an
increased risk to the Fund should any of such related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and generally do not carry the pledge of the credit of the issuing municipality.
There are, of course, variations in the security of Municipal Securities, both
within a particular classification and between classifications.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trust's Board of Trustees determines that amortized cost
reflects fair value of those investments. Amortized cost valuation involves
valuing an instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
- --------------------------------------------------------------------------------
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.
25
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
The Fund declares dividends from its net investment income (that is,
income other than its net realized long- and short-term capital gains) monthly
and pays dividends on the last Friday of the month. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually after the end of the fiscal year in which they have been earned.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 of each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a taxable dividend or tax-free return of capital
(up to the amount of the shareholder's tax basis in his or her shares). The
amount treated as a tax-free return of capital will reduce a shareholder's
adjusted basis in his or her shares. Pursuant to the requirements of the
Investment Company Act of 1940, as amended ("1940 Act") and other applicable
laws, a notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
The per share dividends on Class B shares and Class L shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class L shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y principally as a result of the service fee applicable
to Class A shares. Distributions of capital gains, if any, will be in the same
amount for Classes A, B, L and Y.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended. Dividends paid from the Fund's net investment income
(other than dividends derived from interest earned on qualifying tax-exempt
obligations as
26
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
described below) and distributions of the Fund's net realized short-term capital
gains are taxable to shareholders as ordinary income, regardless of how long
shareholders in the Fund have held their shares and whether the dividends or
distributions are received in cash or reinvested in additional shares of the
Fund. Distributions of the Fund's net realized long-term capital gains will be
taxable to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares of the Fund and whether the distributions
are received in cash or are reinvested in additional Fund shares. In addition,
as a general rule, a shareholder's gain or loss on a sale or redemption of
shares of the Fund will be a long-term capital gain or loss if the shareholder
has held the shares for more than one year and will be a short-term capital gain
or loss if the shareholder has held the shares for one year or less. The per
share dividends and distributions on Class A shares will be higher than the per
share dividends and distributions on Class B shares as a result of lower
distribution and transfer agency fees applicable to Class A shares.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of a Fund derived from interest on Municipal
Securities, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum income
tax.
Statements as to the tax status of the dividends and distributions
received by shareholders of the Fund are mailed annually. These statements set
forth the dollar amount of income excluded from Federal income taxes and the
dollar amount, if any, subject to Federal income taxes. These statements will
also designate the amount of exempt-interest dividends that is a specific
preference item for purposes of the Federal individual and corporate alternative
minimum taxes. The Fund notifies its shareholders annually as to the interest
excluded from Federal income taxes earned by the Fund with respect to those
states and possessions in which the Fund has or had investments.
Shareholders should consult their tax advisers with specific reference to
their own tax situations. Shareholders of the Fund should in particular consult
their tax advisers about the status of the Fund's dividends and distributions
for state and local tax purposes in order to assess the consequences of
investing in the Fund under state and local laws generally and to determine
whether dividends paid by the Fund are exempt from any otherwise applicable
state or local income taxes.
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge as
follows:
Dealer's
Sales Charge Sales Charge Reallowance
as a % of as a % of as a % of
Amount of Investment Transaction Amount Invested Offering Price
- --------------------------------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.60%
$25,000 - $49,999 3.50 3.63 3.15
$50,000 - $99,999 3.00 3.09 2.70
$100,000 - $249,999 2.50 2.56 2.25
$250,000 - $499,999 1.50 1.52 1.35
$500,000 and over * * *
================================================================================
* Purchases of Class A shares 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 Salomon Smith Barney, which compensates Salomon
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 L shares
is waived. See "Deferred Sales Charge Provisions" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended (the "1933 Act"). 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.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001 purchases of Class L shares by investors who were holders of
Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. Salomon Smith Barney and Dealer Representatives 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 the Transfer Agent are not subject to a maintenance fee.
Investors in Class A, Class B and Class L 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 $15,000,000.
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 L shares and 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 required
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, unitholders who invest distributions from a UIT sponsored
by Salomon Smith Barney, and Directors/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 the Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent. It is
not recommended that the Fund be used as a vehicle for Keogh, IRA or other
qualified retirement plans.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 a Dealer
Representative 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 the Fund's
agent prior to its close of business. For shares purchased through Salomon Smith
Barney or a Dealer Representative purchasing through Salomon Smith Barney,
payment for Fund shares is due on the third business day after the trade date.
In all other cases, payment must be made with the purchase order.
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Salomon Smith Barney or the Transfer Agent
is authorized through preauthorized 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 on a monthly or quarterly basis, as
indicated by the shareholder, to provide for 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 Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon 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 Salomon Smith Barney Financial Consultant.
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan 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 Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 that is 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
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
investment advisory subsidiaries of Citigroup; (f) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; (g)
investments of distributions from a UIT sponsored by Salomon Smith Barney; and
(h) purchases by investors participating in a Salomon Smith Barney fee-based
arrangement. 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 other Smith Barney Mutual Funds that are offered
with a sales charge as currently 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.
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount 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 (i) all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the Letter plus (ii) the
value of all Class A shares previously purchased and still owned. 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. The term of the Letter
will commence upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent 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 (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
of $15,000,000 of Class Y shares of the Fund within 13 months from the date of
the Letter. If a total investment of $15,000,000 is not made within the 13 month
period, all Class Y shares purchased to date will be transferred to Class A
shares, where they will be subject to all fees (including a service fee of
0.15%) and expenses applicable to the Fund's Class A shares, which may include a
CDSC of 1.00%. Please contact a Salomon Smith Barney Financial Consultant or the
Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares -- Smith Barney 401(k) and ExecChoice TM
Programs."
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
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class B Dividend Shares owned by the shareholders 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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) 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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class L 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
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.-- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++ Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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
34
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global 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 and Class B shares of the Fund.
** Available for exchange with Class A, Class L and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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. MMC may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares --Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. 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.
36
<PAGE>
- --------------------------------------------------------------------------------
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 Salomon Smith Barney, or if the shareholder's account
is not with Salomon 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or by
submitting a written request for redemption to:
Smith Barney Municipal High Income Fund
Class A, B, L 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 appearing on a share certificate, stock power or written redemption
request in excess of $10,000 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.
37
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Written redemption requests of $10,000 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.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Salomon Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with 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 the applicant's 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 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day on which the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are processed at the net asset
value next determined.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the 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
39
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
an investment in those shares over the 30-day period identified in the
advertisement and is computed by dividing the net investment income per share
earned by the Class during the period by the maximum offering price per share on
the last day of the period. This income is "annualized" by assuming that the
amount of income is generated each month over a one-year period and is
compounded semi-annually. The annualized income is then shown as a percentage of
the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's
tax-exempt yield for each Class. It is calculated by increasing the yield shown
to the extent necessary to reflect the payment of taxes at specified tax rates.
Thus, the equivalent taxable yield always will exceed the Fund's yield. For more
information on equivalent taxable yields, refer to the table under "Dividends,
Distributions and Taxes."
TOTAL RETURN
From time to time the Fund may include the Fund's total return, average
annual total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class L and Class Y shares of the Fund. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gains distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the value
of the investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for each
Class by annualizing the most recent monthly distribution and dividing by the
net asset value or the maximum public offering price (including sales charge) on
the last day of the period for which current dividend return is presented. The
current dividend return for each Class may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing a Class'
current return to yields published for other investment companies and other
investment vehicles. The Fund may also include comparative performance
information in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds or other industry
publications.
40
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and companies that furnish services to the Trust
and the Fund, including agreements with the Fund's distributor, investment
adviser, administrator, custodian and transfer agent. The day-to-day operations
of the Fund are delegated to the Fund's investment adviser and administrator.
The Statement of Additional Information contains background information
regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC (through predecessor entities) has been in
the investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered, the Fund pays MMC a fee at the annual rate of 0.40%
of the value of its average daily net assets. This fee is computed daily and
paid monthly.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, a Managing Director of Salomon Smith Barney, has
served as Vice President and Investment Officer of the Fund since it commenced
operations and manages the day to day operations of the Fund, including making
all investment decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 is
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
MMC a
41
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
fee at the annual rate of 0.20% of the value of its average daily net assets.
This fee is computed daily and paid monthly.
On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a
bank holding company subject to regulation under the Bank Holding Company Act
of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain
other laws and regulations. MMC does not believe that its compliance with the
applicable law will have a material adverse effect on its ability to continue
to provide the Fund with the same level of investment advisory services that it
currently receives.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. 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"), Salomon Smith Barney is paid a service fee with respect to Class
A, Class B and Class L shares of the Fund at the annual rate of 0.15% of the
average daily net assets of the respective Class. Salomon Smith Barney is also
paid a distribution fee with respect to Class B and Class L shares at the annual
rate of 0.50% and 0.55%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no longer be
subject to a distribution fee. The fees are used by Salomon Smith Barney to pay
its Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class L 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 Salomon 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 Salomon Smith Barney
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and Class
L shares, a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Salomon Smith Barney Financial
Consultants may receive different levels of compensation for selling different
Classes of shares.
42
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Salomon 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 Salomon Smith Barney, amounts received under the Plan and
proceeds of the CDSC.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts Business Trust." Each Class of the Fund represents identical
interests in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the impact of the respective sales charges, if
any, for each Class; (c) the distribution and/or service fees, if any, borne by
each Class pursuant to the Plan; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single Class; (f)
the exchange privileges of each Class; and (g) the conversion feature of the
Class B shares.
The Trust's Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each
Class of each Fund will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
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.
The Trust does not hold annual shareholder meetings. There normally will
be no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of holders of at least 10% of the Fund's outstanding shares
and the Fund will assist shareholders in calling such a meeting as required by
the 1940 Act.
PNC Bank, 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.
43
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
The Fund sends its shareholders a semi-annual report and an audited annual
report, which includes a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Salomon Smith
Barney Financial Consultant or the Trust's Transfer Agent.
44
<PAGE>
[This page left intentionally blank]
<PAGE>
[This page left intentionally blank]
<PAGE>
[This page left intentionally blank]
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Municipal
High Income
Fund
388 Greenwich Street
New York, New York 10013
FD0214 11/98
<PAGE>
PROSPECTUS NOVEMBER 27, 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.
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 Salomon Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 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 Salomon 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.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
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.
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 11
- --------------------------------------------------------------------------------
VALUATION OF SHARES 21
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 22
- --------------------------------------------------------------------------------
PURCHASE OF SHARES 24
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE 32
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES 35
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 38
- --------------------------------------------------------------------------------
PERFORMANCE 38
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 39
- --------------------------------------------------------------------------------
DISTRIBUTION 41
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION 42
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN ANY SUCH JURISDICTION.
- -------------------------------------------------------------------
2
<PAGE>
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 Mutual Management Corp. (the "Manager"), formerly known as
Smith Barney Mutual Funds Management Inc., 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 L
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 $15,000,000. 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.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
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 L SHARES. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge.The Class L shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A and
Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L 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 $15,000,000. 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 L 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, Class L shares which have a lower upfront sales charge but are subject
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a
substantial sales charge discount and who have a short-term or undetermined time
frame.
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 L 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
L 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 Smith Barney Mutual
Funds listed under "Exchange Privilege." Class A share purchases may also be
eligible for a reduced initial sales charge. See "Purchase of Shares."
Salomon 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 L 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-TM- 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-TM- Program. Class A and Class L shares are available as investment
alternatives under both of these programs. See "Purchase of Shares -- Smith
Barney 401(k) and ExecChoice-TM- Program Programs."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney Inc. ("Salomon Smith Barney").
(An investment dealer in the selling group and a broker that clears securities
through Salomon Smith Barney are collectively referred to as "Dealer
Representatives"). In addition, certain investors, including qualified
retirement plans and investors purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investors Services Group, Inc. (the "Transfer
Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum initial investment requirement for Class A, Class B and Class L
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 Salomon 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 L 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 The Manager serves as the Fund's
investment manager. The Manager is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"), which, in turn, is a wholly owned subsidiary
of Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad range of
financial services -- asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading -- and use
diverse channels to make them available to consumer and corporate customers
around the world. Among these businesses are Citibank,
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
Commercial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC
Asset Management, Travelers Life & Annuity, and Travelers Property Casualty. 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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, 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."
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND EXPENSES AN
INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF THE FUND,
BASED 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:
<TABLE>
<CAPTION>
CLASS
SMITH BARNEY TOTAL RETURN BOND FUND CLASS A CLASS B L* CLASS Y
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as
a percentage of offering price) 4.50% None 1.00% 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 (after fee waiver)*** 0.44% 0.44% 0.44% 0.44%
12b-1 fees**** 0.25 0.75 0.70 None
Other expenses***** 0.31 0.31 0.31 0.31
- -----------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1.00% 1.50% 1.45% 0.75%
- -----------------------------------------------------------------------------------------
</TABLE>
* Class C shares were renamed Class L Shares.
** 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.
*** "Management Fees" reflect the management fee waiver currently in effect for
the Fund. Absent the fee waiver, the management fee would be incurred at
the rate of 0.65% of each Class' average daily net assets for the current
fiscal period. Absent the fee waiver, total expenses would be incurred at
the rate of 1.21%, 1.71%, 1.66% and 0.96% for Class A, Class B, Class L and
Class Y, respectively.
**** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
***** For Class Y shares, "Other Expenses" have been estimated because no Class
Y shares were outstanding during the fiscal period ended July 31, 1998.
Class A shares of the Fund purchased through the Salomon 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 Salomon 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 L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Salomon
Smith Barney receives an annual 12b-1 service fee of 0.25% of the
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
- -------------------------------------------------------------------
value of average daily net assets of Class A shares. Salomon 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 L shares,
Salomon 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."
<TABLE>
<CAPTION>
SMITH BARNEY TOTAL RETURN BOND FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each time
period:
Class A $ 55 $ 75 $ 98 $162
Class B 60 77 92 165
Class L 35 55 88 182
Class Y 8 24 42 93
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A 55 75 98 162
Class B 15 47 82 165
Class L 25 55 88 182
Class Y 8 24 42 93
- ---------------------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY KPMG PEAT MARWICK LLP,
INDEPENDENT AUDITORS, WHOSE REPORT THEREON FOR THE PERIOD FROM FEBRUARY 27, 1998
TO JULY 31, 1998 APPEARS IN THE FUND'S ANNUAL REPORT DATED JULY 31, 1998. THE
INFORMATION BELOW SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL REPORT, WHICH IS
INCORPORATED BY REFERENCE TO THE STATEMENT OF ADDITIONAL INFORMATION. NO
INFORMATION IS PRESENTED FOR CLASS Y SHARES, BECAUSE NO CLASS Y SHARES WERE
OUTSTANDING FOR THE PERIODS SHOWN.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD:
<TABLE>
<CAPTION>
CLASS CLASS CLASS
SMITH BARNEY TOTAL RETURN BOND FUND A(1) B(1) L(1)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.46 $11.46 $11.46
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.25 0.23 0.22
Net realized and unrealized gain 0.05 0.05 0.06
- -------------------------------------------------------------------------------
Total Income From Operations 0.30 0.28 0.28
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.23) (0.21) (0.21)
- -------------------------------------------------------------------------------
Total Distributions (0.23) (0.21) (0.21)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.53 $11.53 $11.53
- -------------------------------------------------------------------------------
TOTAL RETURN++ 2.64% 2.48% 2.49%
- -------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $54,674 $81,797 $20,386
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2) 1.00% 1.50% 1.45%
Net investment income 5.39 4.90 4.97
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 0% 0% 0%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 27, 1998 (inception date) to July 31, 1998.
(2) The manager waived part of its fees for the period ended July 31, 1998. If
such fees had not been waived, the per share effect on net investment
income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases
in Net Investment Income Expense Ratios
--------------------------- Without Fee Waivers
---------------------------
Class A Class B Class L Class A Class B Class L
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------
$0.01 $ 0.01 $ 0.01 1.21%+ 1.71%+ 1.66%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
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 the Manager. 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
the Manager 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 the Manager'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.
The Fund's ability to achieve maximum total return is limited in certain
markets because the Fund can only invest in fixed-income securities.
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
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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 the Manager 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, the Manager 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. The Manager also will review the ratings, if any,
assigned to the security by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"). The Manager'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 the Manager 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
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
not rated, will be of equivalent investment quality as determined by the
Manager. The Manager 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
obligations under the policies. Prompt payment of principal and interest on GNMA
mortgage pass-through certificates is backed by the full faith and credit of the
United States. FNMA-guaranteed mortgage pass-through certificates and FHLMC
participation certificates are solely the obligations of those entities but are
supported by the discretionary authority of the United States government to
purchase the agencies' obligations. Collateralized mortgage obligations are a
type of bond secured by an underlying pool of mortgages or mortgage pass-through
certificates 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
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
S&P (AAA, AA, A, BBB) or the equivalent rating from another NRSRO. 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 distributions
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
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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.
YANKEE BONDS. The Fund may invest in Yankee obligations. Yankee obligations
are dollar denominated obligations issued in the United States by foreign
issuers. They are subject to certain sovereign risks, including the possibility
that a foreign government might prevent dollar denominated funds flowing across
its borders. Other risks include adverse political and economic developments in
a foreign country; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes and
expropriation or nationalization of foreign issuers.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, 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
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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, U.S. government securities, 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 the Manager 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 the Manager 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 the Manager 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
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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 rating 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 in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon 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. The Manager, 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.
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS. When deemed advisable by the
Manager, 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.
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
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. Consistent with applicable regulatory
requirements, the Fund may lend securities it holds to brokers, dealers and
other financial organizations. The Fund's loans of securities will be
collateralized by cash, letters of credit or government securities that are
maintained at all times in a segregated account with the Fund's custodian in an
amount at least equal to the current market value of the loaned securities. By
lending its portfolio securities, the Fund will seek to generate income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when government securities are used as collateral.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delays 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 the Manager
to be of good standing and will not be made unless, in the judgment of the
Manager, the consideration to be earned from such loans would justify the risk.
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 33 1/3% 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.
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
- -------------------------------------------------------------------
YEAR 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. The Manager and
Salomon Smith Barney have advised the Fund that they have been reviewing all of
their computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems will be
compliant before that date. In addition, the Manager has been advised by the
Fund's custodian, transfer agent, distributor and accounting service agent that
they are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that the Manager, Salomon Smith Barney or
any other service provider will be successful, or that interaction with other
non-complying computer systems will not impair Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
VALUATION OF SHARES
- -------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities that are traded primarily on a domestic stock exchange are valued at
the last sale price on that exchange or, if there were no sales during the day,
at the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. Investments in U.S.
government securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever
21
<PAGE>
VALUATION OF SHARES (CONTINUED)
- -------------------------------------------------------------------
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
generally will be 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.
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
- -------------------------------------------------------------------
The per share dividends on Class B shares and Class L 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 L
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 L 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.
23
<PAGE>
PURCHASE OF SHARES
- -------------------------------------------------------------------
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
CLASS A SHARES. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES SALES DEALER'S
CHARGE AS A CHARGE AS A REALLOWANCE
% % AS %
OF OF AMOUNT OF OFFERING
AMOUNT OF INVESTMENT TRANSACTION INVESTED PRICE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71% 4.00%
$25,000 - $49,999 4.00 4.17 3.60
$50,000 - $99,999 3.50 3.63 3.15
$100,000 - $249,999 2.50 2.56 2.25
$250,000 - $499,999 1.50 1.52 1.35
$500,000 and over * * *
- ----------------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares 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 Salomon Smith Barney, which compensates Salomon 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 L shares is waived. See "Deferred
Sales Charge Provisions" 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. 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.
CLASS B SHARES. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
CLASS L SHARES. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the
1.00% initial sales charge.
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
CLASS Y SHARES. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchase of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
GENERAL
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. Salomon Smith Barney and Dealer Representatives 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 the Fund's Transfer Agent are not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for Class
A, Class B and Class L shares and the subsequent investment requirement for all
Classes in the Fund is $25. 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 L shares and 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 required for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Citigroup
and its subsidiaries, including Salomon Smith Barney, unitholders who invest
distributions from a UIT sponsored by Salomon Smith Barney, and
Directors/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 the
Transfer Agent. Share certificates are issued only upon a shareholder's written
request to the Transfer Agent.
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 a Dealer
Representative 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 Salomon
Smith Barney prior to Salomon Smith Barney's close of business. For shares
purchased through Salomon Smith Barney or a Dealer Representative purchasing
through Salomon Smith Barney, payment for Fund shares is due on the third
business day after the trade 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized 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 on a monthly or quarterly basis as
indicated by the shareholder to provide for 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 Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Smith Barney brokerage account or
redeem the shareholder's shares of a Salomon Smith Barney money market fund to
make additions to the account. Additional information is available from the Fund
or a Salomon Smith Barney Financial Consultant.
SALES CHARGE WAIVERS AND REDUCTIONS
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) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan 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
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
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 Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon 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 that is 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
Citigroup; (f) direct rollovers by plan participants of distributions from a
401(k) plan offered to employees of Citigroup or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent investments
will be subject to the applicable sales charge); (g) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; (h)
investments of distributions from a UIT sponsored by Salomon Smith Barney; and
(i) purchases by investors participating in a Salomon Smith Barney fee-based
arrangement. 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 certain Smith Barney Mutual Funds which are offered
with a sales charge as currently 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.
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
LETTER OF INTENT
CLASS A SHARES. A Letter of Intent for an amount 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 (i) all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the Letter plus (ii) the
value of all Class A shares previously purchased and still owned. 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. The term of the Letter
will commence upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent 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 (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total of $15,000,000 of Class Y shares of the Fund within 13 months
from the date of the Letter. If a total investment of $15,000,000 is not made
within the 13 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 Salomon Smith Barney
Financial Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation of
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
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 L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class A shares and Class L 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
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares -- Smith Barney 401(k) and ExecChoice-TM-
Programs."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ---------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholders 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 Salomon Smith Barney.
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares 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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent 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-TM- PROGRAMS
During the continuous offering period investors may be eligible to
participate in the Smith Barney 401(k) Program or the Smith Barney
ExecChoice-TM- 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.
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
Each Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice-TM-
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 L 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 L SHARES. Class L 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 L shares of one or more funds of the Smith Barney Mutual Funds.
401(k) AND EXECCHOICE-TM- 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-TM- Program, if its
total Class L 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 L shares for Class A shares of a Fund. For Participating Plans originally
established through a Salomon 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 L 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 L 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-TM- Programs
that has not previously qualified for an exchange into Class A shares will be
offered the opportunity to exchange all of its Class L shares for Class A
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
- -------------------------------------------------------------------
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-TM- 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 L shares of
the Fund but instead may acquire Class A shares of the Fund. Any Class L 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-TM- Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following 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
L shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made.
<TABLE>
<C> <S>
FUND NAME
GROWTH FUNDS
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
</TABLE>
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
- -------------------------------------------------------------------
<TABLE>
<C> <S>
TAXABLE FIXED-INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++ Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
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 Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
GLOBAL -- INTERNATIONAL FUNDS
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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
</TABLE>
33
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
- -------------------------------------------------------------------
<TABLE>
<C> <S>
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. -- Global 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
</TABLE>
- -------------------------------------------------------------------
* Available for exchange with Class A, Class L 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 L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class L shares of the Fund through the Smith
Barney 401(k) or ExecChoice-TM- Programs may exchange those shares for
Class L 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 L EXCHANGES. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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
34
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
- -------------------------------------------------------------------
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 the Transfer Agent
receives further instructions from Salomon Smith Barney, or if the shareholder's
account is not with Salomon 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 Salomon Smith Barney
brokerage account, these funds will not be invested for the shareholder's
benefit
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
- -------------------------------------------------------------------
without specific instruction and Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or by
submitting a written request for redemption to:
Smith Barney Total Return Bond Fund
Class A, B, L 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 the Transfer Agent together with the redemption request.
Any signature required in connection with a written redemption request in excess
of $10,000, 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 $10,000 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. The Transfer Agent 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 the Transfer Agent receives all required documents in
proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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
the Transfer Agent 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 the Transfer Agent
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.
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
- -------------------------------------------------------------------
REDEMPTIONS. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling the
Transfer Agent at (800) 451-2010. Such requests may be made between 9:00 a.m.
and 4:00 p.m. (Eastern 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 the Transfer Agent at (800) 451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern 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.
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
- -------------------------------------------------------------------
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 Salomon 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."
38
<PAGE>
PERFORMANCE (CONTINUED)
- -------------------------------------------------------------------
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 L 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. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Trust.
39
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
- -------------------------------------------------------------------
INVESTMENT MANAGER
The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment manager. The Manager is a wholly owned
subsidiary of Holdings. The Manager (through its predecessor entities) has been
in the investment counseling business since 1968 and is a registered investment
adviser. The Manager renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager 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 the Manager 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 the Manager 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 since inception
(February 27, 1998) of the Fund.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 are included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
On October 8, 1998 Travelers Group Inc. and Citicorp
consummated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Holding
Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act and
certain other laws and regulations. The Manager does not believe that its
compliance with the applicable law will have a material adverse effect on its
ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.
40
<PAGE>
DISTRIBUTION
- -------------------------------------------------------------------
CFBDS is located at 21 Milk Street, Boston, MA 02109-5048. CFBDS distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS to take and
pay for only such securities as may be sold to the public. The Fund has adopted
a Plan of distribution under Rule 12b-1 under the 1940 Act (the "Plan"),
pursuant to which Salomon Smith Barney is paid a service fee with respect to
Class A, Class B and Class L shares of the Fund at the annual rate of 0.25% of
the average daily net assets of the respective Class. Salomon Smith Barney is
also paid a distribution fee with respect to Class B and Class L 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 Salomon Smith Barney to pay
its Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class L 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 Salomon 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 Salomon Smith Barney
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and Class
L shares, a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Salomon 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 Salomon 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 Salomon Smith Barney, amounts received under the Plan and
proceeds of the CDSC.
41
<PAGE>
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.
The Transfer Agent is located at Exchange Place, Boston, Massachusetts
02109.
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 Salomon Smith
Barney Financial Consultants or the Transfer Agent.
42
The Prospectus of the Premium Total Return Fund, a Series of
the Smith Barney Income Funds, filed on April 24, 1998 with
Post-Effective Amendment No. 48 to the Fund's Registration
Statement on form N-1A (Accession No. 0000091155-98-000282)
is incorporated by reference in its entirety.
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 27, 1998
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectuses of
Smith Barney Income Funds (the "Trust"), relating to seven investment
funds offered by the Trust: Smith Barney Balanced Fund (the "Balanced
Fund") (formerly Smith Barney Utilities Fund), 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 Municipal High Income Fund
(the "Municipal High Income Fund") and Smith Barney Total Return Bond
Fund ("Total Return Bond Fund"), each a "Fund" and together the "Funds,"
each dated November 27, 1998, (except for Premium Total Return Fund
which is dated April 29, 1998) 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 Salomon 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. 7
Purchase of Shares 27
Redemption of Shares 28
Distributor.. 28
Valuation of Shares 31
Exchange Privilege 31
Performance Data (See in the Prospectuses "Performance" or "Yield
Information") 32
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes") 37
Additional Information 41
Voting Rights 42
Financial Statements 47
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
CFBDS, Inc. ("CFBDS")
Distributor
Mutual Management Corp. ("MMC"),
(formerly known as Smith Barney
Mutual Funds Management Inc.)
Investment Adviser and Administrator
to the Convertible Fund, Diversified
Strategic Income Fund, Exchange
Reserve Fund, High Income Fund,
Municipal High Income Fund, Total
Return Bond Fund and Balanced Fund.
Smith Barney Global Capital
Management Inc. ("Global Capital
Management")
Sub-Investment Adviser to Diversified
Strategic Income Fund
PNC Bank, National Association
("PNC Bank")
Custodian to Convertible Fund,
Exchange Reserve Fund, High Income
Fund, Municipal High Income Fund,
Total Return Bond Fund and Balanced
Fund
Chase Manhattan Bank ("Chase")
Custodian to Diversified Strategic
Income Fund
First Data Investors Services
Group, Inc. ("First Data")
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 71). Retired; formerly Chairman and Chief
Executive Officer of Associated Merchandising Corporation, a major
retail merchandising and sourcing organization. His address is 106
Barnes Road, Stamford, Connecticut 06902.
Allan J. Bloostein, Trustee (Age 68). 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 57). 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 58 Ivy Chase, Atlanta, GA 30342.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
65). Managing Director of Salomon Smith Barney Inc. ("Salomon Smith
Barney") and Chairman of the Board of Smith Barney Strategy Advisers
Inc.; and President of MMC and Travelers Investment Adviser, Inc.
("TIA"). Mr. McLendon is Chairman or Co-Chairman of the Board and
Director of 58 investment companies associated with Salomon Smith Barney
Holdings Inc. His address is 388 Greenwich Street, New York, New York
10013.
John C. Bianchi, Vice President and Investment Officer (Age 43).
Managing Director of Salomon Smith Barney; Investment Officer of other
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
James E. Conroy, Vice President and Investment Officer (Age 47).
Managing Director of Salomon Smith Barney. Investment Officer of other
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age 51).
Managing Director of Salomon Smith Barney; Investment Officer of other
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Simon R. Hildreth, Vice President and Investment Officer (Age 46).
Managing Director of Salomon Smith Barney, member of the Investment
Policy of Smith Barney Global Capital Management Inc.; Mr. Hildreth is
Vice President and Investment Officer of other Smith Barney Mutual
Funds. Prior to 1994, a Director of Mercury Asset Management Ltd., a
fund manager located in the United Kingdom. His address is 10
Piccadilly, London, WIV 9LA, UK.
Charles P. Graves, III, Vice President and Investment Officer (Age 36).
Managing Director of Salomon Smith Barney. His address is 388 Greenwich
Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer (Age 50).
Managing Director of Salomon Smith Barney. Investment Officer of other
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Robert E. Swab, Investment Officer (Age 43). Vice President of Salomon
Smith Barney. His address is 388 Greenwich Street, New York, New York
10013.
Phyllis M. Zahorodny, Vice President and Investment Officer (Age 40).
Managing Director of Salomon Smith Barney. Investment Officer of other
Smith Barney Mutual Funds.Her address is 388 Greenwich Street, New York,
New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney; Director and Senior Vice
President of MMC and TIA. Mr. Daidone serves as Senior Vice President
and Treasurer or Executive Vice President and Treasurer of other
investment companies associated with Salomon Smith Barney. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon
Smith Barney; General Counsel and Secretary of MMC and TIA. Ms. Sydor
serves as Secretary or Executive Vice President and General Counsel of
other investment companies associated with Salomon Smith Barney. 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 Smith Barney Mutual Funds. Global Capital
Management and MMC 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 November 6, 1998, 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 Salomon Smith Barney or any
Salomon 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 Salomon
Smith Barney or any of its affiliates a fee of $17,000 per year plus
$3,250 per meeting attended, and reimburses them for travel and out-of-
pocket expenses. For the fiscal year ended July 31, 1998, such travel
and out-of-pocket expenses totaled $5,368.
For the fiscal year ended July 31, 1998 and the calendar year
ended December 31, 1997, the Trustees of the Trust were paid the
following compensation:
Trustee(*)
Aggregate
Compensation
from the Funds
for the Fiscal
Year ended
July 31, 1998
Total
Pension or
Retirement
Benefits
Accrued
from the
Funds
Aggregate
Compensation
from the Funds
and the Fund
Complex for the
Year ended
December 31,
1997
Number of
Funds for
Which Person
Served
Within Fund
Complex
Lee Abraham
$37,810
$0
$38,650
2
Allan J.
Bloostein
38,070
0
85,850
8
Richard E.
Hanson, Jr.
38,170
0
47,350
2
Heath B.
McLendon
0
0
0
58
Investment Advisers, Sub-Investment Advisers and Administrator
MMC serves as investment adviser ("Investment Adviser") to one or more
Funds pursuant to a separate written agreement with the relevant Fund
(an "Advisory Agreement"). MMC is a wholly owned subsidiary of Salomon
Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Citigroup Inc. ("Citigroup") 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 5 1998.
MMC also serves as administrator (the "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 on August 5, 1998. Global Capital Management serves as a sub-
investment adviser ("Sub-Investment Adviser") to Diversified Strategic
Income Fund, pursuant to a written agreement dated March 21, 1994,
respectively. Both agreements were most recently approved by the Fund's
Board of Trustees, including a majority of the Independent Trustees, on
August 5, 1998.
Certain of the services provided to the Trust by the Investment
Advisers and the Sub-Investment Advisers are described in the
Prospectuses under "Management of the Trust and the Fund." Each
Investment Adviser, Sub-Investment Adviser, and the Administrator pays
the salaries of all officers and employees who are employed by both it
and the Trust, and maintains office facilities for the Trust. In
addition to those services, MMC 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 Investment Advisers and Sub-Investment Advisers 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%
Municipal High Income Fund
0.40%
Total Return Bond Fund
0.65%
Balanced Fund
0.45%
For the periods below, the Funds paid investment advisory fees to
their respective Investment Advisers as follows:
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
$417,942
$489,663
$665,663
Diversified Strategic
Income Fund
11,818,108
12,546,980
13,233,258
Exchange Reserve Fund
448,925
442,557
326,309
High Income Fund
4,506,352
5,646,405
7,363,535
Municipal High Income
Fund
3,771,279
3,395,338
3,103,442
Total Return Bond Fund(1)
N/A
N/A
378,792
Balanced Fund
8,094,511
6,431,624
5,097,517
____________________________
(1) Total Return Bond Fund waived $124,974 in management fees for the
fiscal year ended July 31, 1998. The administrative fees have
been included in the total for management fees.
As compensation for administrative services, each Fund pays the
Administrator 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 MMC:
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
$167,177
$195,865
$266,265
Diversified Strategic
Income Fund
5,252,493
5,576,436
5,881,448
Exchange Reserve Fund
299,283
295,038
217,539
High Income Fund
1,802,541
2,258,562
2,945,414
Municipal High Income
Fund
1,885,640
1,697,669
1,551,721
Total Return Bond Fund*
N/A
N/A
N/A
Balanced Fund
3,597,560
2,858,500
2,265,563
___________________________
* The administrative fees have been included in the total for
management fees.
For the fiscal years ended July 31, 1996, 1997 and 1998,
Diversified Strategic Income Fund paid Global Capital Management sub-
investment advisory fees of $2,626,246, $2,788,218 and $2,940,724,
respectively.
Each Investment Adviser and MMC, 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
Investment Adviser and MMC 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, 1996, 1997 and 1998.
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
Salomon Smith Barney or MMC; 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, 1999.
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 Investment 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 Investment Adviser will carefully evaluate such investments on
a case-by-case basis.
The 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. The 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.
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 Investment Advisers and/or Sub-Investment 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 Investment Adviser and/or Sub-
Investment 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.
When-Issued Securities and Delayed-Delivery Transactions
(Diversified Strategic Income, High Income, Total Return Bond and
Municipal High Income Funds). To secure an advantageous price or yield,
these Funds may purchase certain securities on a when-issued basis or
purchase or sell securities for delayed delivery. A Fund will enter into
such transactions for the purpose of acquiring portfolio securities and
not for the purpose of leverage. Delivery of the securities in such
cases occurs beyond the normal settlement periods, but no payment or
delivery is made by a Fund prior to the reciprocal delivery or payment
by the other party to the transaction. In entering into a when-issued or
delayed-delivery transaction, a Fund will rely on the other party to
consummate the transaction and may be disadvantaged if the other party
fails to do so.
U.S. government securities and Municipal Securities (as defined
below) are normally 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 of securities on a when-issued or
delayed-delivery basis by a Fund, the Fund will meet its obligations on
the settlement date 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 (Convertible, Diversified
Strategic Income, High Income, Total Return Bond and Balanced 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, except Total
Return Bond Fund, which may lend its portfolio securities to the fullest
extent allowed under the 1940 Act. A Fund will not lend portfolio
securities to Salomon 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 Investment Adviser to
be of good standing and will not be made unless, in the judgment of the
Investment Adviser, the consideration to be earned from such loans would
justify the risk.
Medium-, Low- and Unrated Securities (Convertible, Diversified
Strategic Income, High Income, Total Return Bond and Municipal High
Income 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, MMC, 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 (Convertible, Diversified Strategic Income,
High Income, and Balanced 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 Investment 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 Investment 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
Investment 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. "Average rate" or "Look-
back" options are options where the option's strike price at expiration
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 Investment Adviser believes there is an active
secondary market, 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. At times in the
past, for example, higher than anticipated trading activity or order
flow or other unforeseen events have rendered inadequate certain of the
facilities of the Clearing Corporation as well 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 a Fund as a covered call option
writer 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 that may be
held, 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 Investment
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 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 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 (Balanced Fund). These Funds may purchase and
write put and call options on U.S. stock indexes listed on U.S.
exchanges for the purpose of hedging their portfolios. 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 are currently 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 Balanced Fund 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 Investment 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 Balanced Fund will engage in stock index options transactions
only when determined by their respective Investment 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, it will establish a segregated account in the name of the
Fund consisting of cash, equity securities or debt securities of any
grade in an amount equal to or greater than the market value of the
option, provided such securities are liquid and unencumbered and are
marked to market daily pursuant to guidelines established by the
Trustees.
Mortgage-Related Securities (Diversified Strategic Income,
Exchange Reserve and Total Return Bond 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 of the security at any time, or
securities held in its portfolio denominated or quoted in, or currently
convertible into (such as through exercise of an option or consummation
of a forward currency contract) 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 may either
sell a portfolio security and make delivery of the currency or retain
the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the relevant
Fund will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If a Fund retains the
portfolio security and engages in an offsetting transaction, the Fund,
at the time of execution of the offsetting transaction, will incur a
gain or loss to the extent movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date
that it enters into an offsetting contract for the purchase of the
currency, the Fund will realize a gain to the extent that the price of
the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will
suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because transactions
in currency exchange are usually conducted on a principal basis, no fees
or commissions are involved. The use of forward currency contracts does
not eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in the
future. In addition, although forward currency contracts limit the risk
of loss due to a decline in the value of the hedged currency, at the
same time they limit any potential gain that might result should the
value of the currency increase.
If a devaluation is generally anticipated, the Diversified
Strategic Income and High Income Funds may not be able to contract to
sell the currency at a price above the devaluation level they
anticipate.
Foreign Currency Options (Diversified Strategic Income and High
Income Funds) The High Income Fund may only purchase put and call
options on foreign currencies, whereas the Diversified Strategic Income
Fund may purchase or write put and call options on foreign currencies
for the purpose of hedging against changes in future currency exchange
rates. Foreign currency options generally have three, six and nine month
expiration cycles. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires. Call options
convey the right to buy the underlying currency at a price which is
expected to be lower than the spot price of the currency at the time
that the option expires.
The Fund may use foreign currency options under the same
circumstances that it could use forward currency exchange transactions.
A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated, for example, will reduce the dollar value of
the securities even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of
securities that it holds, the Fund may purchase put options on the
foreign currency. If the value of the currency declines, 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, i.e., 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.
Non-Taxable Municipal Securities (Municipal High Income Fund).
Non-taxable Municipal securities include debt obligations issued to fund
various public purposes, such as constructing public facilities,
refunding outstanding obligations, paying general operating expenses and
extending loans to public institutions and facilities. 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 may be 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 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
such risks, Municipal High 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, which provides that the seller will either
remarket or repurchase the municipal lease within a short period after
demand by the Fund.
Taxable Municipal Securities. (Total Return Bond Fund). The Total
Return Bond Fund will 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.
Temporary Investments (Municipal High Income Fund). When Municipal
High Income Fund is maintaining a defensive position it 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 a rating not lower than A-2 by S&P or Prime-2 by Moody's at the
time of purchase; and (iii) variable-rate demand notes rated within the
two highest ratings by any major rating service, or determined to be of
comparable quality to instruments with such rating, at the time of
purchase; 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) CDs 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, however, intends 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.
Futures Activities (Diversified Strategic Income, High Income,
Municipal High Income, Total Return Bond and Balanced Funds). These
Funds may enter into futures contracts and/or options on futures
contracts that are traded on a U.S. exchange or board of trade. These
investments may be made by a Fund 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 but not for purposes of speculation. In the case of Municipal
High Income Fund, investments in futures contracts will be made only in
unusual circumstances, such as when the Fund's Investment Adviser
anticipates an extreme change in interest rates or market conditions.
See "Taxes" below.
Futures Contracts (Convertible, Diversified Strategic Income,
Municipal High Income Total Return Bond Fund and Balanced Funds). The
Funds may acquire or sell a futures contract to mitigate the effect of
fluctuations in interest rates, currency values or market conditions
(depending on the type of contract) on portfolio securities without
actually buying or selling the securities. For example, if Municipal
High 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, 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 for the purpose of hedging against changes in
the value of its portfolio securities but 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.
When deemed advisable by MMC, the Total Return Bond 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.
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 to and from the broker, known as
variation margin, 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 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 Investment 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 Investment 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 Investment 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 (Convertible, Diversified Strategic Income,
High Income and Balanced Funds). 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 these factors 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. Government 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 payment
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 of the Fund to market and foreign exchange
fluctuations brought about by such delays, and 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 (Balanced Fund). Balanced 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 or (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, U.S. government securities,
equity securities or debt securities of any grade, providing such
securities have been determined by the Investment Adviser to be liquid
and unencumbered and are marked to market daily pursuant to guidelines
established by the Trustees. 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 the
market value of the securities at the time they were sold short and the
value of any assets 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 such that the amount deposited in the
account plus the amount deposited with the broker, not including the
proceeds from the short sale, will equal the current market value of
the securities sold short and will not be less than the market value of
the securities at the time they were sold short.
Short Sales Against the Box (Convertible and Balanced 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. A Fund will enter into this kind of short
sale,, described as "against the box," 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 a Fund will have to pay an
amount equal to any dividends paid on the common stock sold short prior
to delivery, it 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 Trust has adopted investment restrictions 1 through 8 below as
fundamental policies with respect to the Funds, which, under the terms
of the 1940 Act, may not be changed without the vote of a majority of
the outstanding voting securities of a Fund. A "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 9 through 16
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. Investing in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Investing in "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder except as
permitted under the 1940 Act and the rules, regulations and
orders thereunder.
3. Investing more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities
of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry.
4. Borrowing money, except that (a) the Fund may borrow from banks
for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Fund may to the extent consistent with its investment policies,
enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques.
To the extent that it engages in transactions described in (a)
and (b), the Fund will be limited so that no more than 33-1/3%
of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the
time the borrowing is made, is derived from such transaction.
5. Purchasing securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box" and for the Balanced Fund which may
make short sales or maintain a short position to the extent of
5% of its net assets). For purposes of this restriction the
deposit or payment by the Fund of underlying securities and
other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities,
indexes or similar items is not considered to be the purchase
of a security on margin.
6. Making Loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Fund may invest
consistent with its investment objective and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940 Act.
7. Underwriting securities issued by other persons, except to the
extent that the Fund may technically be deemed an underwriter
under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
8. Purchasing or selling real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Fund from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests
therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the Fund's
investment objective and policies); (d) investing in real
estate investment trust securities; or (e) investing in gold
bullion and coins or receipts for gold.
9. Investing in oil, gas or other mineral exploration or
development programs, except that the Convertible, Diversified
Strategic Income, Balanced and High Income Funds may invest in
the securities of companies that invest in or sponsor those
programs.
10. 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.
11. 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, TDs 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,
securities subject to Rule 144A of the 1933 Act (provided at
least two dealers make a market in such securities) and certain
privately issued commercial paper eligible for resale without
registration pursuant to Section 4(2) of the 1933 Act will not
be subject to this restriction
12 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 Municipal High
Income Fund, this restriction shall apply to the entity
supplying the revenues from which the issue is to be paid.
13. Making investments for the purpose of exercising control or
management.
14. 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 Investment 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.
15. Investing in warrants other than those acquired by the Fund as
part of a unit or attached to securities at the time of
purchase (except as permitted under a Fund's investment
objective and policies) 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. At no time may more than 2% of
the Fund's net assets be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent
permitted by applicable state securities laws.
16. With respect to Balanced Fund, 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 the 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.
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 if all of a Fund's
securities that are included in the computation of turnover were
replaced once during a one-year period. 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 Investment 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, 1996, 1997 and 1998, the
portfolio turnover rates were as follows:
For the Fiscal Year Ended
July 31:
Fund
1996
1997
1998
Convertible Fund
59%
57%
49%
Diversified Strategic
Income Fund
90
85
128
High Income Fund
72
78
102
Municipal High Income
Fund
44
51
84
Total Return Bond Fund
N/A
N/A
0
Balanced Fund
58
45
110
<R/>
For regulatory purposes, the turnover rate of Exchange Reserve Fund is
zero.
Portfolio Transactions
Most of the purchases and sales of securities by a Fund, whether
transacted on a securities exchange or over the counter, will be made 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 Investment Adviser, who is also
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 MMC, 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 Investment
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 Investment 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 Investment
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:
Total Brokerage Commissions Paid
Fiscal
Year
Convertible Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1996
$16,920
$32,621
$2,446,072
$50,196
N/A
1996*
- --
- --
- --
- --
N/A
1997
- --
- --
138,150
- --
N/A
1998
23,753
34,725
2,187,80
5
20,200
- --
Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Convertible Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1996
- --
- --
91,818
- --
N/A
1996*
- --
- --
- --
- --
N/A
1997
- --
- --
138,150
- --
N/A
1998
- --
- --
139,236
- --
- --
% of Total Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Convertible Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1996
- --
- --
3.75%
- --
N/A
1996*
- --
- --
- --
- --
N/A
1997
- --
- --
6.60
- --
N/A
1998
- --
- --
6.36
- --
- --
% of Total Dollar Amount of Transactions Involving Commissions Paid to
Salomon Smith Barney
Fiscal
Year
Convertible Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1996
- --
- --
2.72%
- --
N/A
1996*
- --
- --
- --
- --
N/A
1997
- --
- --
5.85
- --
N/A
1998
- --
- --
6.54
- --
- --
* 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 Investment Adviser seeks the best
overall terms available. In assessing the best overall terms available
for any transaction, each Investment 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
Investment Adviser authorizes the Investment 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 Investment 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, Salomon 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 Salomon Smith Barney and other affiliated broker-
dealers if, in the judgment of the Fund's Investment 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,
Salomon 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 Salomon Smith Barney
to effect such transactions, and (b) Salomon 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 Salomon Smith Barney is a
member, except to the extent permitted by the SEC.
The Funds may use Salomon Smith Barney as a commodities broker in
connection with entering into futures contracts and options on futures
contracts. Salomon Smith Barney has agreed to charge the Funds commodity
commissions at rates comparable to those charged by Salomon 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 Salomon 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 Salomon 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 and Class L shares an initial sales charge.
The public offering price for a Class B (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, Class L and Class O 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 Salomon Smith Barney Financial Consultant.
DISTRIBUTOR
CFBDS serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
When payment is made by the investor before the settlement date,
unless otherwise directed by the investor, the funds will be held as a
free credit balance in the investor's brokerage account, and Salomon
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 Salomon Smith Barney to invest the funds in a Salomon 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 Salomon Smith Barney money market fund, and affiliates of Salomon
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 Salomon 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, 1998, Salomon Smith Barney
and/or PFS incurred distribution expenses for advertising, printing and
mailing prospectuses, support services and overhead expenses, to Salomon
Smith Barney or PFS Financial Consultants and for accruals for interest
on the excess of Salomon 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 Salomon Smith Barney and/or PFS are expressed
in the following table:
Fund Name
Financial
Consultant
Compensation
Branch
Expenses
Advertising
Expenses
Printing
Expenses
Interest
Expenses
Other
Expenses
Div.
Strat.
$12,436,072
$8,959,209
$966,299
$168,014
$412,185
$10,505,708
Balanced
90,235
3,559,360
195,177
66,243
(61,163)
3,759,617
High
Income
6,034,688
3,573,384
430,209
47,639
211,863
4,263,094
Muni High
603,894
1,333,426
133,180
38,047
825
1,505,478
Convertible
164,695
239,557
17,098
2,858
3,038
262,550
Ex.
Reserve
- --
146,365
--
9,149
(26,919)
128,594
Total
Return
6,229,612
1,010,375
138,608
612
117,941
1,267,536
Distribution Arrangements
Shares of the Trust are sold on a best efforts basis by CFBDS as
sales agent of the Trust pursuant to the Distribution Agreement. To
compensate Salomon 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 Salomon Smith Barney a service fee, accrued daily
and paid monthly, calculated at the annual rate of 0.25% (0.15% in the
case of Municipal High Income Fund) of the value of the Fund's average
daily net assets attributable to its Class A, Class B, Class L and
Class O shares. In addition, each Fund except the Exchange Reserve
Fund, pays Salomon Smith Barney, with respect to its Class B, Class L
and Class O shares, a distribution fee. The Exchange Reserve Fund pays
PFS a distribution fee with respect to its Class B shares. The
distribution fee is primarily intended to compensate Salomon Salomon
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 L shares' distribution fees, accrued daily and paid monthly, are
calculated at the annual rate of 0.50% for Class B shares of each Fund
and 0.45% for Class L shares, except the Smith Barney Balanced Fund and
the Smith Barney Convertible Fund (0.50% for Class L shares in the case
of Exchange Reserve Fund and 0.55% for Class L shares in the case of
Municipal High Fund) of the value of a Fund's average daily net assets
attributable to the shares of the respective Class. For the Smith
Barney Convertible Fund and the Smith Barney Balanced Fund, Class L and
Class O shares' distribution fees, accrued daily and paid monthly, are
calculated at the annual rate of 0.75% for Class L shares and 0.45% for
Class O shares.
For the fiscal years ended July 31, 1998, Salomon Smith Barney
received $57,460,253, in the aggregate from the Trust under the Plan.
The following expenses were incurred during the periods indicated:
Initial Sales Charges (paid to Salomon Smith Barney).
Class A
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
$49,000
$19,000
$19,000
Diversified Strategic
Income Fund
792,000
983,000
1,344,000
High Income Fund
593,000
726,000
1,571,000
Municipal High Income
Fund
47,000
46,000
70,000
Total Return Bond Fund
N/A
N/A
1,146,000
Balanced Fund
228,000
55,000
68,000
Class L
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
N/A
N/A
$2,000
Diversified Strategic
Income Fund
N/A
N/A
78,000
High Income Fund
N/A
N/A
112,000
Municipal High Income
Fund
N/A
N/A
3,000
Total Return Bond Fund
N/A
N/A
21,000
Balanced Fund
N/A
N/A
4,000
CDSC (paid to Salomon Smith Barney)
Class A
For the Fiscal Year Ended July 31:
Fund
1998
Convertible Fund
N/A
Diversified Strategic Income Fund
23,000
Exchange Reserve Fund
N/A
High Income Fund
12,000
Municipal High Income Fund
N/A
Total Return Bond Fund
1,000
Balanced Fund
N/A
Class B
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
$95,000
$59,000
$50,000
Diversified Strategic Income Fund
4,015,000
2,858,000
2,494,000
Exchange Reserve Fund
765,000
618,000
349,000
High Income Fund
915,000
831,000
936,000
Municipal High Income Fund
929,000
525,000
231,000
Total Return Bond Fund
N/A
N/A
34,000
Balanced Fund
3,393,000
2,514,000
829,000
Class L
For the Fiscal Year Ended July 31:
Fund
1998
Convertible Fund
$0
Diversified Strategic Income Fund
35,000
Exchange Reserve Fund
N/A
High Income Fund
20,000
Municipal High Income Fund
0
Total Return Bond Fund
20,000
Balanced Fund
0
Class O
For the Fiscal Year Ended July 31:
Fund
1998
Balanced Fund
$1,000
Service Fees and Distribution Fees
For the Fiscal Year Ended July 31:
Fund
1996
1997
1998
Convertible Fund
$433,951
$413,173
$400,232
Diversified Strategic Income Fund
18,641,336
19,195,740
19,373,203
Exchange Reserve Fund
748,208
737,595
543,651
High Income Fund
4,893,170
5,818,152
7,255,916
Municipal High Income Fund
4,945,112
4,316,732
3,734,428
Total Return Bond Fund
N/A
N/A
329,050
Balanced Fund
12,152,329
9,205,137
7,016,893
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 Salomon 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, Salomon 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, Martin Luther
King Jr. 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, MMC, 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 Municipal High Income Fund, are valued by MMC, 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 and Class Y shares may exchange all or a portion of
their shares of the respective Class without imposition of any
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.
D. Class L and Class O Shares may be exchanged with Class L
shares of any of the other funds.
Dealers other than Salomon 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 Salomon 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. Salomon 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 the Funds' yield or total return
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 L, Class O 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, 1998, the annualized yield
was 4.31% and 4.29% for Class B and Class C shares, respectively. The
compound effective yield was 4.41% and 4.38% for Class B and Class C
shares, respectively. As of July 31, 1998, the Fund's average portfolio
maturity was 18 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-b+1)^6)-1]
Cd
regarding:
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 sales charges of the Fund's
Class A shares were as follows for the periods indicated:
Fund*
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund
(3.13)%
8.25%
9.41%
Diversified Strategic
Income Fund
2.60
6.69
7.47
High Income Fund
3.92
8.57
10.47
Municipal High Income Fund
2.29
5.25
6.35
Total Return Bond Fund
N/A
N/A
(1.97)
Balanced Fund
10.85
7.58
9.53
*Each Fund, except Total Return Bond Fund, commenced selling Class
A shares on November 6, 1992. The Total Return Bond Fund commenced
operations on February 27, 1998.
The average annual total returns with CDSC (with fees waived) of
the Fund's Class B shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Ten-Year
Period
Since
Inception
Convertible Fund (1)
(3.03)%
8.70%
9.00%
8.76%
Diversified Strategic Income
Fund (2)(6)
2.46
7.05
N/A
8.90
High Income Fund(3)(6)
3.87
8.91
9.15
9.32
Municipal High Income
Fund(4)(6)
1.53
5.43
7.43
8.17
Total Return Bond Fund(7)
N/A
N/A
N/A
(2.02)
Balanced Fund(5)
11.17
8.00
10.94
10.78
(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%.
(7) Fund commenced operations on January 21, 1998.
The average annual total returns with sales charges (with fees
waived) of the Fund's Class L shares were as follows for the periods
indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(3)
N/A
N/A
(2.69)%
Diversified Strategic
Income Fund (5)
5.04%
6.99%
7.16
High Income Fund (4)
6.31
N/A
11.40
Municipal High Income
Fund(2)
3.88
N/A
9.80
Total Return Bond Fund
N/A
N/A
0.44
Balanced Fund(6)
N/A
N/A
(4.19)
(1) The Fund commenced selling Class L shares (previously designated
as Class C shares) on June 1, 1993.
(2) The Fund commenced selling Class L shares (previously designated as
Class C shares) on November 17, 1994.
(3) The Fund commenced selling Class L shares on June 15, 1998.
(4) The Fund commenced selling Class L shares (previously designated as
Class C shares) on August 24, 1994.
(5) The Fund commenced selling Class L shares (previously designated as
Class C shares) on March 19, 1993.
(6) The Fund commenced selling Class L shares on June 15, 1998.
The average annual total returns with sales charges (with fees
waived) of the Fund's Class O shares were as follows for the periods
indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
0.62%
N/A
12.21%
Balanced Fund(2)
15.19
8.17
8.95
(1) The Fund commenced selling Class O shares (previously designated
as Class C shares) on November 7, 1994.
(2) The Fund commenced selling Class O shares (previously designated as
Class C shares) on February 4, 1993.
The average annual total returns (with fees waived) of the Fund's
Class Y shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
2.42%
N/A
11.09%
Diversified Strategic
Income Fund (2)
7.96
N/A
9.35
High Income Fund (3)
9.18
N/A
11.56
Balanced Fund(4)
16.67
N/A
12.22
(1) The Fund commenced selling Class Y shares on February 7, 1996.
(2) The Fund commenced selling Class Y shares on October 10, 1995.
(3) The Fund commenced selling Class Y shares on April 28, 1995.
(4) The Fund commenced selling Class Y shares on October 9, 1995.
The average annual total returns (with fees waived) of the Fund's
Class Z shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Diversified Strategic
Income Fund (1)
7.78%
8.05%
8.68%
High Income Fund (2)
9.33
9.88
11.65
Balanced Fund(3)
17.08
9.01
10.84
(1) The Fund commenced selling Class Z shares on November 6, 1992.
(2) The Fund commenced selling Class Z shares on November 6, 1992.
(3) The Fund commenced selling Class Z shares on November 6, 1992.
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.
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.
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 non-convertible
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.
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 re-characterize
long-term gain as short-term gain, or to re-characterize 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 re-
characterized 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.
Constructive Sales. If a Fund effects a short sale of securities
at a time when it has an unrealized gain on the securities, it may be
required to recognize that gain as if it had actually sold the
securities (as a "constructive sale") at the time it effects the short
sale. However, such constructive sale treatment may not apply if the
Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain
other conditions are satisfied. Uncertainty regarding the tax
consequences of effecting short sales may limit the extent to which a
Fund may effect short sales.
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. A portion of long-term capital gains (including such gains
attributable to the 60% long-term gains portion of gains on Section 1256
contracts) may be designated as eligible for the 20% maximum capital
gains tax rate on gains realized by individuals from capital assets held
for more than 18 months.
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.
Municipal High Income Fund. Because the Municipal High 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.
VOTING RIGHTS
The Trustees themselves have the power to alter the number and
the terms of office of the Trustees, and they may at any time lengthen
their own terms or make their terms of unlimited duration (subject to
certain removal procedures) and appoint their own successors, provided
that in accordance with the 1940 Act at any time at least a majority,
but in most instances at least two-thirds, of the Trustees have been
elected by the shareholders of the Fund. Shares do not have cumulative
voting rights and therefore the holders of more than 50% of the
outstanding shares of the Fund may elect all of the Trustees
irrespective of the votes of other shareholders. Class A, Class B,
Class O, Class L and Class Y shares of a Fund, if any, represent
interests in the assets of that Fund and have identical voting,
dividend, liquidation and other rights on the same terms and
conditions, except that each Class of shares has exclusive voting
rights with respect to provisions of the Fund's Rule 12b-1 distribution
plan which pertain to a particular class. For example, a change in
investment policy for a Fund would be voted upon only by shareholders
of the Fund involved. Additionally, approval of each Fund's Investment
Advisory Agreement is a matter to be determined separately by that
Fund. Approval of a proposal by the shareholders of one Fund is
effective as to that Fund whether or not enough votes are received from
the shareholders of the other Funds to approve the proposal as to those
Funds. As of November 6, 1998, the following shareholders beneficially
owned 5% or more of a class of shares of a Fund:
High Income Fund - Class Y
Smith Barney Concert Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 6,702,935.779 (33.98%) shares
Smith Barney Concert Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 5,148,496.717 (26.10%) shares
Byrd & Co.
First Union National Bank
Taxable Account
Attn: Diane Pilegg
Mutual Funds DVD Proc. #PA4905
530 Walnut Street
Philadelphia, PA 19106-3620
Owned 2,271,447.367 (11.52%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,371,711.234 (6.95%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,230,335.484 (6.24%) shares
Byrd & Co.
First Union National Bank
Taxable Account
Attn: Diane Pilegg
Mutual Funds DVD Proc. #PA4905
530 Walnut Street
Philadelphia, PA 19106-3620
Owned 1,099,252.743 (5.57%) shares
High Income Fund- Class Z
Ennis D. Robertson
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 4,219.858 (45.75%) shares
Ennis D. Robertson
Smith Barney Inc. IRA Custodian
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 4,032.265 (43.71%) shares
Michael A. Blum
Smith Barney Inc. Rollover Custodian
235 East 22nd Street, Apt. 101
New York, NY 10010-4637
owned 967.568 (10.49%) shares
Municipal High Income Fund - Class L
Margaret C. Glass
311 Louise Drive
Lafayette, LA 70506-3239
owned 8,933.416 (6.90%) shares
Joann Donovan
Separate Property
5302 Yarwell Dr.
Houston, TX 77096
owned 8,210.854 (6.35%) shares
Avery Brighton
Mason Flinn Trustees
Larsen Flinn TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares
Avery Brighton
Larsen Flinn Trustees
Mason Flinn TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares
Mason Flinn
Larsen Flinn Trustees
Avery Flinn Family TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares
Terrance Winkler TTEE
FBO Terrance Winkler
UAD 5/29/87
C/o Insurance Brokers Ser. Inc.
20 N. Wacker Drive, 40th Floor
Chicago, Il 60606
Owned 6,904.292 (5.34%) shares
Katherine C. Ellis TTEE
UWD Robert J. Ellis
7580 Spalding Lane
Atlanta, GA 30350
Owned 6,802.927 (5.26%) shares
Balanced Fund- Class L
Roy G. Childers Sr.
Smith Barney Inc. IRA Custodian
559 Vaughan Drive
Satsuma, AL 36572-2861
Owned 23,843.047 (16.05%) shares
Dorothy M Burns
Smith Barney Inc. IRA custodian
21257 Westover Circle
Riverside, CA 92518-2922
Owned 15,916.06 (10.71%) shares
Balanced Fund Class Z
Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 877,093.853 (95.53%) shares
Convertible Fund - Class L
Harold Egon Gottschalk Jr.
And Barbara Gottschalk
Community Property
11603 Osage Trail
Lakeside, CA 92040
Owned 3,409.697 (15.32%) shares
Raymond Trudeau
Smith Barney Inc. IRA Custodian
99 Plummer Hill Road
Belmont, NH 03220-5811
Owned 2,906.239(13.06%) shares
James Kononuk
Smith Barney Inc. Rollover Cust.
130 K 6th Street
North Arlington, NJ 07031
Owned 2,783.765 (12.51%) shares
Harold A. Savage
Smith Barney Inc. IRA Custodian
2108 Ludwick Drive
Maryville, TN 37803
Owned 1,727.101 (7.76%) shares
Wilmer L. Keiser
Betty L. Keiser TTEES
The Keiser Family Trust
UAD 4/1/97
13060 Metcalf, Apt. 303
Overland Park, KS 66213
Owned 1,641.497(7.38%) shares
Rudolph B. and Helen E. Grom
UAD 5/11/92
Rudolph B. & Helen Grom Trust
13627 W. Pyracantha Dr.
Sun City West, AZ 85375
Owned 1,601.537 (7.20%) shares
George K. Stoltenberg
Smith Barney Inc. KEO PS Cust.
44 Church St.
Apt. 3
Burlington, VT 05401
Owned 1,372.171(6.17%) shares
Jay Burgess TRS
FBO Jay G. Burgess
UAD 7/23/85
3061 N. Southern Hills Ave.
Wadsworth, IL 60083
Owned 1,151.401 (5.17%)shares
Marjorie C. Gilmore
Smith Barney Inc. IRA Custodian
1055 West River Road
Grand Island, NY 14072
Owned 1,115.854(5.01%) shares
Convertible Fund - Class O
Norman O. Davis and Karen J. Davis, Trustees
Davis Trust 1995 u/a/d 10/18/95
5280 Via Ester
Yorba Linda, CA 92686-4530
owned 6,862.065 (8.74%) shares
C. Travis Hedemann
2115 Lexington
Houston, TX 77254-0303
owned 4,447.162 (5.66%) shares
Convertible Fund - Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,123,029.234 (61.01%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 863,496.605 (16.87%) shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 671,129.248 (13.11%) shares
Diversified Strategic Income Fund Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 9,225,586.838(52.88%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,302,383.059 (18.93%) shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,992,220.376 (11.42%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,833,945.945 (10.51%) shares
Diversified Strategic Income Fund Class Z
Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 2,631,963.692 (99.99%) shares
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31, 1998
(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 27, 1998
Convertible Fund
Diversified Strategic Income Fund
Exchange Reserve Fund
High Income Fund
Municipal High Income Fund
Total Return Bond Fund
Balanced Fund
Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013 SALOMON SMITH BARNEY
A Member of CitiGroup
FD 01217 11/98
The Statement of Additional Information of the Premium Total
Return Fund, a Series of the Smith Barney Income Funds,
filed on April 24, 1998 with Post-Effective Amendment No. 48 to
the Fund's Registration Statement on form N-1A (Accession No.
0000091155-98-000282) is incorporated by reference in its
entirety.
SMITH BARNEY INCOME FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended July
31, 1998 and the Report of Independent Auditors dated September
16, 1998 are incorporated by reference to the Definitive 30b2-1
filed on October 19, 1998 as Accession #0000091155-98-000627.
The Registrant's Annual Report (Smith Barney Premium Total
Return Fund) for the fiscal year ended December 31, 1997 and the
Report of Independent Auditors dated February 10, 1998 are
incorporated by reference to the Definitive 30b2-1 filed on
March 26, 1998 as Accession #0000091155-98-000200.
Included in Part C:
Consent of Independent Auditors is filed herein.
(b) Exhibits:
All references are to the Registrant's registration statement on
Form N-1A (the "Registration Statement") as filed with the
Securities and Exchange Commission (the "SEC") on March 13, 1985
(File Nos. 2-96408 and 811-4254).
(1) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to
the Master Trust Agreement dated July 30, 1993 are
incorporated by reference to Post-Effective Amendment No.
36.
(a) Amendment to Registrant's Master Trust Agreement dated June
12, 1998 filed herein.
(2) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrant's form of stock certificate for Smith Barney
Total Return Bond Fund Class A, Class B, Class C and Class
Y shares of beneficial interest is filed herewith.
(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) Form of Investment Management Agreement between Registrant
and Mutual Management Corp. with respect to Smith Barney
Total Return Bond Fund is filed herewith.
(d) 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.
(e) Sub-Investment Advisory Agreement between the Registrant
and Smith Barney Global Capital Management Inc. with
respect to Smith Barney Diversified Strategic Income Fund
is incorporated by reference to Post-Effective Amendment
No. 40.
(6)(a) Distribution Agreement between the Registrant and
Smith
Barney Inc. is incorporated by reference to the Post-
Effective Amendment No. 40.
(b) Distribution Agreement between the Registrant and PFS
Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(c) Distribution Agreement between the Registrant and
CFBDS, Inc. dated October 8, 1998 is filed herein.
(7) Not Applicable.
(8)(a) Custodian Agreement between the Registrant and PNC Bank,
National Association ("PNC Bank") is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(b) A form of Custodian Agreement between the Registrant and
Chase Manhattan Bank is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(9)(a) Administration Agreement between the Registrant and MMC
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) Consent of Independent Auditors is filed herein.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15)(a) Services and Distribution Plans pursuant to Rule
12b-1 between the Registrant on behalf of Smith Barney
Diversified Strategic Income Fund, Smith Barney Utilities
Fund, Smith Barney Convertible Securities Fund, Smith
Barney High Income Fund, Smith Barney Premium Total Return
Fund, Smith Barney Tax-Exempt Income Fund and Smith Barney
Exchange Reserve Fund are incorporated by reference to
Post-Effective Amendment No. 40.
(b) Form of Amended and Restated Shareholder Services and
Distribution Plan pursuant to Rule 12b-1 between the Registrant
and Smith Barney Inc.
(16) Performance Data for Registrant is incorporated by
reference to Post-Effective Amendments No. 14, 15 and 30
to the Registration Statement filed on September 30, 1988,
December 30, 1988 and January 29, 1992, respectively.
(17) Financial Data Schedule is filed herein.
(18) Amended Plan pursuant to Rule 18f-3(d) is filed herein.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record
Holders
by Class as of November 20,
1998
Beneficial Interest par value
$.001 per share
Fund Class A Class B Class L Class O Class Y Class Z
Balanced
Fund 20,507 47,968 168 492 2 3
Convertible
Fund 3,022 2,734 31 88 7 N/A
Diversified
Strategic
Income
Fund 18,327 95,624 6,518 N/A 8 3
Exchange
Reserve
Fund N/A 5,951 785 N/A N/A N/A
High Income
Fund 23,209 36,895 4,904 N/A 11 4
Municipal
High Income
Fund 7,329 11,503 79 N/A 1 N/A
Premium
Total
Return
Fund 46,456 156,310 1,874 8,005 9 N/A
Total Return
Bond Fund 1,864 5,103 1,347 N/A 1 N/A
Item 27. Indemnification
The response to this item is incorporated by reference to
Registrant's
Post-Effective Amendment No. 2 to the Registration Statement.
Item 28. (a) Business and Other Connections of Investment
Adviser
Investment Adviser - Mutual Management Corp. ("MMC")
MMC, formerly known as Smith Barney Mutual Funds Management
Inc., was incorporated in December 1968 under the laws of the
State of Delaware. MMC is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. ("Holdings") (formerly known as Smith
Barney Holdings Inc.), which in turn is a wholly owned
subsidiary of Citigroup ("Citigroup"). MMC 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
MMC together with information as to any other business,
profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two
fiscal years, is incorporated by reference to Schedules A and D
of FORM ADV filed by MMC 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 MMC. 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
MMC 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 MMC 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
(a) CFBDS, Inc. the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert
Investment Series, Consulting Group Capital Markets Funds,
Greenwich Street Series Fund, 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 Allocation Series Inc., Smith Barney
Equity Funds, Smith Barney Fundamental Value Fund Inc., Smith
Barney Funds, Inc., Smith Barney Income Funds, Smith Barney
Institutional Cash Management Fund, Inc., Smith Barney Investment
Trust, 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 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 Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney
Variable Account Funds, Smith Barney World Funds, Inc., Travelers
Series Fund Inc., and various series of unit investment trusts.
In addition, CFBDS, Inc. is also the distributor for
CitiFunds(SM) International Growth & Income Portfolio,
CitiFunds(SM) International Growth Portfolio, CitiFunds(SM)
Intermediate Income Portfolio, CitiFunds(SM) Short-Term U.S.
Government Income Portfolio, CitiFunds(SM) Large Cap Growth
Portfolio, CitiFunds(SM) Cash Reserves, CitiFunds(SM) U.S.
Treasury Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves,
CitiFunds(SM) Premium Liquid Reserves, CitiFunds(SM) Tax Free
Reserves, CitiFunds(SM) California Tax Free Reserves,
CitiFunds(SM) Connecticut Tax Free Reserves, CitiFunds(SM) New
York Tax Free Reserves, CitiFunds(SM) Balanced Portfolio,
CitiFunds(SM) Small Cap Value Portfolio, CitiFunds(SM) Growth &
Income Portfolio, CitiFunds(SM) Small Cap Growth Portfolio,
CitiFunds(SM) National Tax Free Income Portfolio, CitiFunds(SM)
New York Tax Free Income Portfolio, CitiFunds(SM) California Tax
Free Income Portfolio, CitiSelect(R) VIP Folio 200, CitiSelect(R)
VIP Folio 300, CitiSelect(R) VIP Folio 400, CitiSelect(R) VIP
Folio 500, CitiFunds(SM) Small Cap Growth VIP Portfolio,
CitiSelect(R) Folio 200, CitiSelect(R) Folio 300, CitiSelect(R)
Folio 400, and CitiSelect(R) Folio 500. CFBDS is also the
placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio,
Intermediate Income Portfolio, Short-Term Portfolio, Growth &
Income Portfolio, Large Cap Growth Portfolio, Small Cap Growth
Portfolio, International Equity Portfolio, Balanced Portfolio,
Government Income Portfolio, Tax Free Reserves Portfolio, Cash
Reserves Portfolio and U.S. Treasury Reserves Portfolio.
In addition, CFBDS Inc. is also the distributor for the following
Salomon Brothers funds: Salomon Brothers Opportunity Fund Inc,
Salomon Brothers Investors Fund Inc, Salomon Brothers Capital
Fund Inc, Salomon Brothers Series Funds Inc, Salomon Brothers
Institutional Series Funds Inc, Salomon Brothers Variable Series
Funds Inc
(b) The information required by this Item 29 with respect to
each director and officer of CFBDS, Inc. is incorporated by
reference to Schedule A of Form BD filed by CFBDS pursuant to the
Securities and Exchange Act of 1934 (File No. 8-32417).
(c) not applicable
Item 30. Location of Accounts and Records
(1) Salomon 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) Mutual Management Corp.
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) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual
report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, the
Registrant, SMITH BARNEY INCOME FUNDS, has duly caused this
Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the
City of New York, State of New York on the 24th day of November,
1998.
SMITH BARNEY INCOME FUNDS
By:/s/ Heath B. McLendon
Heath B. McLendon, Chairman of
the Board, President and
Chief Executive Officer
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, 11/24/98
Heath B. McLendon President and Chief
Executive Officer
/s/Lewis E. Daidone Senior Vice President, 11/24/98
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Lee Abraham* Trustee 11/24/98
Lee Abraham
/s/ Allan J. Bloostein* Trustee 11/24/98
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee 11/24/98
Richard E. Hanson
* Signed by Heath B. McLendon, their duly authorized attorney-in-
fact,
pursuant to power of attorney dated September 4, 1996.
/s/Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibits
(1)(a) Amendment to Master Trust Agreement
6(c) Distribution Agreement between the Registrant and
CFBDS, Inc.
(11) Consent of KPMG Peat Marwick LLP
(15)(b) Amended Services and Distribution Plan
(17) Financial Date Schedule
(18) Rule 18f-3(d) Multiple Class Plan
Cover Page
SMITH BARNEY INCOME FUNDS
AMENDMENT NO. 6
TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
AMENDMENT NO. 6 to the First Amended and Restated Master
Trust Agreement dated as of November 5, 1992 (the "Agreement") of
Smith Barney Income Funds (the "Trust"), made as of the 12th day
of June, 1998.
WITNESSETH:
WHEREAS, Article VII, Section 7.3 of the Agreement provides
that the Agreement may be amended at any time, so long as such
amendment does not materially adversely affect the rights of any
shareholder and so long as such amendment is not in contravention
of applicable law, including the Investment Company Act of 1940,
as amended, by an instrument in writing signed by an officer of
the Trust pursuant to a vote of a majority of the Trustees; and
WHEREAS, the Trustees have the authority under Section 4.1
of the Agreement to issue classes of shares (as defined in the
Agreement) of any Sub-Trust (as defined in the Agreement) or
divide the shares of any Sub-Trust into classes, each class
having such different dividend, liquidation, voting and other
rights as the Trustees may determine, and to establish and
designate the specific classes of shares of each Sub-Trust; and
WHEREAS, on May 15, 1998, a majority of the Trustees voted
to redesignate the existing "Class C" shares as "Class L" shares
for the following sub-trusts - Smith Barney Diversified Strategic
Income Fund, Smith Barney Municipal High Income Fund, Smith
Barney High Income Fund, Smith Barney Exchange Reserve Fund and
Smith Barney Total Return Bond Fund; and
WHEREAS, on May 15, 1998, a majority of Trustees voted to
redesignate "Class C" shares as "Class O" shares for the
following sub-trusts - Smith Barney Premium Total Return Fund,
Smith Barney Balanced Fund and Smith Barney Convertible Fund; and
WHEREAS, on May 15, 1998, a majority of Trustees voted to
establish a new class of shares designated as "Class L" shares
for the following Sub-Trusts - Smith Barney Premium Total Return
Fund, Smith Barney Balanced Fund and Smith Barney Convertible
Fund; and
WHEREAS, the undersigned has been duly authorized by the
Trustees to execute and file this Amendment No. 6 to the
Agreement; and
NOW, THEREFORE, the Agreement is hereby amended as follows:
1. The first paragraph of Article IV, Section 4.2 of the
Agreement is hereby amended to read in pertinent part as follows:
"Section 4.2 Establishment and Designation of Sub-Trusts.
Without limiting the authority of the Trustees set forth in
Section 4.1 to establish and designate any further Sub-Trusts and
classes, the Trustees hereby establish and designate the
following Sub-Trusts and classes thereof: "Smith Barney
Diversified Strategic Income Fund" and "Smith Barney High Income
Fund" which shall consist of five classes of shares designated as
Class A, Class B, Class L, Class Y and Class Z shares; "Smith
Barney Exchange Reserve Fund", "Smith Barney Municipal High
Income Fund" and "Smith Barney Total Return Bond Fund" which
shall consist of four classes of shares designated as Class A,
Class B, Class L, and Class Y shares; "Smith Barney Premium Total
Return Fund" and "Smith Barney Convertible Fund" which shall
consist of five classes of shares designated as Class A, Class B,
Class L, Class O, and Class Y shares; and Smith Barney Balanced
Fund which shall consist of six classes of shares designated as
Class A, Class B, Class L, Class O, Class Y and Class Z shares.
The shares of such Sub-Trusts and classes thereof and any shares
of any further Sub-Trusts or classes that may from time to time
be established and designated by the Trustees shall (unless the
Trustees otherwise determine with respect to some further Sub-
Trust or class at the time of establishing and designating the
same) have the following relative rights and preferences:"
The undersigned hereby certifies that the Amendment set
forth above has been duly adopted in accordance with the
provisions of the Agreement.
IN WITNESS WHEREOF, the undersigned has hereto set his
hands as of the day and year first above written.
SMITH BARNEY INCOME
FUNDS
By:
_____________________________
__
Name: David A. Barnett
Title: Assistant Secretary
U:\LEGAL\FUND\SLIP\MISC\AMENDTRUST6
SMITH BARNEY INCOME FUNDS
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the
"Fund") has agreed that you shall be, for the period of this
Agreement, the non-exclusive principal underwriter and distributor
of shares of the Fund and each Series of the Fund set forth on
Exhibit A hereto, as such Exhibit may be revised from time to time
(each, including any shares of the Fund not designated by series,
a "Series"). For purposes of this Agreement, the term "Shares"
shall mean shares of the each Series, or one or more Series, as
the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of
Shares covered by, and in accordance with, the registration
statement, prospectus and statement of additional information then
in effect under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the
"1940 Act"), and will transmit or cause to be transmitted promptly
any orders received by you or those with whom you have sales or
servicing agreements for purchase or redemption of Shares to the
Transfer and Dividend Disbursing Agent for the Fund of which the
Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit
orders for the sale of Shares. It is contemplated that you will
enter into sales or servicing agreements with registered
securities dealers and banks and into servicing agreements with
financial institutions and other industry professionals, such as
investment advisers, accountants and estate planning firms. In
entering into such agreements, you will act only on your own
behalf as principal underwriter and distributor. You will not be
responsible for making any distribution plan or service fee
payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as principal underwriter and
distributor of Shares in compliance with all applicable laws,
rules, and regulations, including, without limitation, all rules
and regulations made or adopted from time to time by the
Securities and Exchange Commission (the "SEC") pursuant to the
1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is
warranted for any reason, including, without limitation, market,
economic or political conditions, the Fund's officers may decline
to accept any orders for, or make any sales of, any Shares until
such time as those officers deem it advisable to accept such
orders and to make such sales and the Fund shall advise you
promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and
all expenses in connection with maintaining facilities for the
issue and transfer of Shares and for supplying information, prices
and other data to be furnished by the Fund hereunder, and all
expenses in connection with the preparation and printing of the
Fund's prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders; provided
however, that nothing contained herein shall be deemed to require
the Fund to pay any of the costs of advertising or marketing the
sale of Shares.
2.2 The Fund agrees to execute any and all documents
and to furnish any and all information and otherwise to take any
other actions that may be reasonably necessary in the discretion
of the Fund's officers in connection with the qualification of
Shares for sale in such states and other U.S. jurisdictions as the
Fund may approve and designate to you from time to time, and the
Fund agrees to pay all expenses that may be incurred in connection
with such qualification. You shall pay all expenses connected
with your own qualification as a securities broker or dealer under
state or Federal laws and, except as otherwise specifically
provided in this Agreement, all other expenses incurred by you in
connection with the sale of Shares as contemplated in this
Agreement.
2.3 The Fund shall furnish you from time to time, for
use in connection with the sale of Shares, such information
reports with respect to the Fund or any relevant Series and the
Shares as you may reasonably request, all of which shall be signed
by one or more of the Fund's duly authorized officers; and the
Fund warrants that the statements contained in any such reports,
when so signed by the Fund's officers, shall be true and correct.
The Fund also shall furnish you upon request with (a) the reports
of annual audits of the financial statements of the Fund for each
Series made by independent certified public accountants
retained by the Fund for such purpose; (b) semi-annual unaudited
financial statements pertaining to each Series; (c) quarterly
earnings statements prepared by the Fund; (d) a monthly itemized
list of the securities in each Series' portfolio; (e) monthly
balance sheets as soon as practicable after the end of each month;
(f) the current net asset value and offering price per share for
each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the
financial condition of each Series of the Fund as you may
reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the
Fund with the SEC under the 1933 Act and the 1940 Act with respect
to the Shares have been prepared in conformity with the
requirements of said Acts and the rules and regulations of the SEC
thereunder. As used in this Agreement, the terms "registration
statement", "prospectus" and "statement of additional information"
shall mean any registration statement, prospectus and statement of
additional information filed by the Fund with the SEC and any
amendments and supplements thereto filed by the Fund with the SEC.
The Fund represents and warrants to you that any registration
statement, prospectus and statement of additional information,
when such registration statement becomes effective and as such
prospectus and statement of additional information are amended or
supplemented, will include at the time of such effectiveness,
amendment or supplement all statements required to be contained
therein in conformance with the 1933 Act, the 1940 Act and the
rules and regulations of the SEC; that all statements of material
fact contained in any registration statement, prospectus or
statement of additional information will be true and correct when
such registration statement becomes effective; and that neither
any registration statement nor any prospectus or statement of
additional information when such registration statement becomes
effective will include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or
supplements to any prospectus or statement of additional
information as, in the light of future developments, may, in the
opinion of the Fund, be necessary or advisable. If the Fund shall
not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Fund of a
written request from you to do so, you may, at your option,
terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file
any amendment to any registration statement or supplement to any
prospectus or statement of additional information without giving
you reasonable notice thereof in advance; provided, however, that
nothing contained in this Agreement shall in any way limit the
Fund's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus or
statement of additional information, of whatever character, as the
Fund may deem advisable, such right being in all respects absolute
and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from
time to time, in connection with the sale of Shares. The Fund
agrees to indemnify, defend and hold you, your several officers
and directors, and any person who controls you within the meaning
of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or
liabilities and any such counsel fees incurred in connection
therewith) which you, your officers and directors, or any such
controlling person, may incur under the 1933 Act or under common
law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any
statement of additional information or arising out of or based
upon any omission, or alleged omission, to state a material fact
required to be stated in any registration statement, any
prospectus or any statement of additional information or necessary
to make the statements in any of them not misleading; provided,
however, that the Fund's agreement to indemnify you, your officers
or directors, and any such controlling person shall not be deemed
to cover any claims, demands, liabilities or expenses arising out
of any statements or representations made by you or your
representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements
as are furnished to you pursuant to paragraph 2.3 of this
Agreement; and further provided that the Fund's agreement to
indemnify you and the Fund's representations and warranties herein
before set forth in paragraph 3 of this Agreement shall not be
deemed to cover any liability to the Fund or its shareholders to
which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
your duties, or by reason of your reckless disregard of your
obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon
the Fund's being notified of any action brought against you, your
officers or directors, or any such controlling person, such
notification to be given by letter or by telegram addressed to the
Fund at its principal office in New York, New York and sent to the
Fund by the person against whom such action is brought, within ten
days after the summons or other first legal process shall have
been served. The failure so to notify the Fund of any such action
shall not relieve the Fund from any liability that the Fund may
have to the person against whom such action is brought by reason
of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's
indemnity agreement contained in this paragraph 4.1. The Fund
will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case,
such defense shall be conducted by counsel of good standing chosen
by the Fund. In the event the Fund elects to assume the defense
of any such suit and retains counsel of good standing, the
defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but if
the Fund does not elect to assume the defense of any such suit,
the Fund will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel retained by
you or them. The Fund's indemnification agreement contained in
this paragraph 4.1 and the Fund's representations and warranties
in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of
you, your officers and directors, or any controlling person, and
shall survive the delivery of any of the Fund's Shares. This
agreement of indemnity will inure exclusively to your benefit, to
the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons
and their successors. The Fund agrees to notify you promptly of
the commencement of any litigation or proceedings against the Fund
or any of its officers or Board members in connection with the
issuance and sale of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund,
its several officers and Board members, and any person who
controls the Fund within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) that the Fund,
its officers or Board members or any such controlling person may
incur under the 1933 Act, or under common law or otherwise, but
only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be
based upon (a) any unauthorized sales literature, advertisements,
information, statements or representations or (b) any untrue, or
alleged untrue, statement of a material fact contained in
information furnished in writing by you to the Fund and used in
the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or
statement of additional information, or shall arise out of or be
based upon any omission, or alleged omission, to state a material
fact in connection with such information furnished in writing by
you to the Fund and required to be stated in such answers or
necessary to make such information not misleading. Your agreement
to indemnify the Fund, its officers or Board members, and any such
controlling person, as aforesaid, is expressly conditioned upon
your being notified of any action brought against the Fund, its
officers or Board members, or any such controlling person, such
notification to be given by letter or telegram addressed to you at
your principal office in Boston, Massachusetts and sent to you by
the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been
served. You shall have the right to control the defense of such
action, with counsel of your own choosing, satisfactory to the
Fund, if such action is based solely upon such alleged
misstatement or omission on your part or with the Fund's consent,
and in any event the Fund, its officers or Board members or such
controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action with
counsel of its own choosing reasonably acceptable to you but shall
not have the right to settle any such action without your consent,
which will not be unreasonably withheld. The failure to so notify
you of any such action shall not relieve you from any liability
that you may have to the Fund, its officers or Board members, or
to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission,
otherwise than on account of your indemnity agreement contained in
this paragraph 4.2. You agree to notify the Fund promptly of the
commencement of any litigation or proceedings against you or any
of your officers or directors in connection with the issuance and
sale of any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under
any of the provisions of this Agreement and no orders for the
purchase or sale of such Shares under this Agreement shall be
accepted by the Fund if and so long as the effectiveness of the
registration statement then in effect or any necessary amendments
thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by
Section 5(b) (2) of the 1933 Act is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5
shall in any way restrict or have an application to or bearing
upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's
prospectus, statement of additional information or charter
documents, as amended from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for
sale by you shall be offered for sale at a price per share (the
"offering price") equal to (a) their net asset value (determined
in the manner set forth in the Fund's charter documents and the
then-current prospectus and statement of additional information)
plus (b) a sales charge, if applicable, which shall be the
percentage of the offering price of such Shares as set forth in
the Fund's then-current prospectus relating to such Series. In
addition to or in lieu of any sales charge applicable at the time
of sale, Shares of any class of any Series of the Fund offered for
sale by you may be subject to a contingent deferred sales charge
as set forth in the Fund's then-current prospectus and statement
of additional information. You shall be entitled to receive any
sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a
broker or dealer through whom you sell Shares shall be governed by
a separate agreement between you and such broker or dealer and the
Fund's then-current prospectus and statement of additional
information
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC
for amendments to the registration
statement, prospectus or statement of
additional information then in effect
or for additional information;
(b) in the event of the issuance
by the SEC of any stop order suspending
the effectiveness of the registration
statement, prospectus or statement of
additional information then in effect
or the initiation of any proceeding for
that purpose;
(c) of the happening of any
event that makes untrue any statement
of a material fact made in the
registration statement, prospectus or
statement of additional information
then in effect or that requires the
making of a change in such registration
statement, prospectus or statement of
additional
information in order to make the
statements therein not misleading; and
(d) of all actions of the SEC
with respect to any amendment to the
registration statement, or any
supplement to the prospectus or
statement of additional information
which may from time to time be filed
with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof,
shall have an initial term of one year from the date hereof, and
shall continue for successive annual periods thereafter so long as
such continuance is specifically approved at least annually by (a)
the Fund's Board or (b) by a vote of a majority (as defined in the
1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a
majority of the Board members of the Fund who are not interested
persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' notice by the Fund's Board or by vote
of holders of a majority of the relevant Series outstanding voting
securities, or on 90 days' notice by you. This Agreement will
also terminate automatically, as to the relevant Series, in the
event of its assignment (as defined in the 1940 Act and the rules
and regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising
under this Agreement (collectively, a "Dispute") shall be settled
by arbitration administered under the rules of the American
Arbitration Association ("AAA") in New York, New York. Any
arbitration and award of the arbitrators, or a majority of them,
shall be final and the judgment upon the award rendered may be
entered in any state or federal court having jurisdiction. No
punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and
distributor of Shares, you shall not perform any services for any
entity other than investment companies advised or administered by
Citigroup Inc. or its subsidiaries. The Fund recognizes that the
persons employed by you to assist in the performance of your
duties under this Agreement may not devote their full time to such
service and nothing contained in this Agreement shall be deemed to
limit or restrict your or any of your affiliates right to engage
in and devote time and attention to other businesses or to render
services of whatever kind or nature. This Agreement and the
terms and conditions set forth herein shall be governed by, and
construed in accordance with, the laws of the State of New York.
11. Limitation of Liability (Massachusetts business
trusts only)
The Fund and you agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the
Trustees, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund, individually, but
are binding only upon the assets and property of the Fund, as
provided in the Master Trust Agreement. The execution and
delivery of this Agreement have been authorized by the Trustees
and signed by an authorized officer of the Fund, acting as such,
and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Fund as
provided in its Master Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and
returning to us the enclosed copy, whereupon this Agreement will
become binding on you.
Very truly yours,
SMITH BARNEY INCOME FUNDS
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
U:\legal\funds\slip\1998\secdocs\pea52cfbds
EXHIBIT A
Smith Barney Income Funds
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Page: 3
3
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Income Funds:
We consent to the use of our reports dated September 16, 1998,
with respect to the Funds listed below of Smith Barney Income
Funds, incorporated herein by reference and to the references to
our Firm under the headings "Financial Highlights" in the
Prospectus and "Counsel and Auditors" in the Statement of
Additional Information.
Funds
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney Balanced Fund
Smith Barney Total Return Bond Fund
Smith Barney Municipal High Income Fund
Smith Barney High Income Fund
Smith Barney Convertible Fund
KPMG Peat Marwick LLP
New York, New York
November 24, 1998
FORM OF
AMENDED AND RESTATED
SHAREHOLDER SERVICES AND DISTRIBUTION PLAN
This Amended and Restated Shareholder Services and Distribution
Plan (the "Plan") is adopted in accordance with Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by [Name of Fund], a [business trust organized under
the laws of the Commonwealth of Massachusetts (the "Trust") on
behalf of its sub-trust] / [a corporation organized under the laws
of the State of Maryland (the "Fund")], subject to the following
terms and conditions:
Section 1. Annual Fee.
(a) Service Fee for Class A shares. The [Trust/Fund] will pay
to Smith Barney Inc., a corporation organized under the
laws of the State of Delaware ("Smith Barney"), a service
fee under the Plan at an annual rate of [ %] of the
average daily net assets of the Fund attributable to the
Class A shares sold and not redeemed (the "Class A
Service Fee").
(b) Service Fee for Class B shares. The [Trust/Fund] will pay
to Smith Barney a service fee under the Plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class B shares sold and not
redeemed (the "Class B Service Fee").
(c) Distribution Fee for Class B shares. In addition to the
Class B Service Fee, the [Trust/Fund] will pay Smith
Barney a distribution fee under the Plan at the annual
rate of [ %] of the average daily net assets of the
Fund attributable to the Class B shares sold and not
redeemed (the "Class B Distribution Fee").
(d) Service Fee for Class L shares. The [Trust/Fund] will
pay to Smith Barney a service fee under the plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class L shares sold and not
redeemed (the "Class L Service Fee").
(e) Distribution Fee for Class L shares. In addition to the
Class L Service Fee, the [Trust/Fund] will pay Smith
Barney a distribution fee under the Plan at the annual
rate of [ %] of the average daily net assets of the
Fund attributable to the Class L shares sold and not
redeemed (the "Class L Distribution Fee").
(f) Payment of Fees. The Service Fees and Distribution Fees
will be calculated daily and paid monthly by the
[Trust/Fund] with respect to the foregoing classes of the
Fund's shares (each a "Class" and together, the
"Classes") at the annual rates indicated above.
Section 2. Expenses Covered by the Plan.
With respect to expenses incurred by each Class, its respective
Service Fee and/or Distribution Fee may be used by Smith Barney
for: (a) costs of printing and distributing the [Trust's/Fund's]
prospectuses, statements of additional information and reports to
prospective investors in the [Trust/Fund]; (b) costs involved in
preparing, printing and distributing sales literature pertaining
to the [Trust/Fund]; (c) an allocation of overhead and other
branch office distribution-related expenses of Smith Barney; (d)
payments made to, and expenses of, Smith Barney's financial
consultants and other persons who provide support services to
[Trust/Fund] shareholders in connection with the distribution of
the [Trust's/Fund's] shares, including but not limited to, office
space and equipment, telephone facilities, answering routine
inquires regarding the [Trust/Fund] and its operation, processing
shareholder transactions, forwarding and collecting proxy
material, changing dividend payment elections and providing any
other shareholder services not otherwise provided by the
[Trust's/Fund's] transfer agent; and (e) accruals for interest on
the amount of the foregoing expenses that exceed the Distribution
Fee for that Class and, in the case of Class B and Class L shares,
any contingent deferred sales charges received by Smith Barney;
provided, however, that (i) the Distribution Fee for a particular
Class may be used by Smith Barney only to cover expenses primarily
intended to result in the sale of shares of that Class, including,
without limitation, payments to the financial consultants of Smith
Barney and other persons as compensation for the sale of the
shares, and (ii) the Service Fees are intended to be used by Smith
Barney primarily to pay its financial consultants for servicing
shareholder accounts, including a continuing fee to each such
financial consultant, which fee shall begin to accrue immediately
after the sale of such shares.
Section 3. Approval by Shareholders
The Plan will not take effect, and no fees will be payable
in accordance with Section 1 of
the Plan, with respect to a Class until the Plan has been approved
by a vote of at least a majority
of the outstanding voting securities of the Class. The Plan will
be deemed to have been approved
with respect to a Class so long as a majority of the outstanding
voting securities of the Class votes
for the approval of the Plan, notwithstanding that: (a) the Plan
has not been approved by a majority of the outstanding voting
securities of any other Class, or (b) the Plan has not been
approved by a majority of the outstanding voting securities of the
[Trust/Fund].
Section 4. Approval by [Trustees/Directors.]
Neither the Plan nor any related agreements will take effect
until approved by a majority vote of both (a) the Board of
[Trustees/Directors] and (b) those [Trustees/Directors] who are
not interested persons of the [Trust/Fund] and who have no direct
or indirect financial interest in the operation of the Plan or in
any agreements related to it (the "Qualified
[Trustees/Directors]"), cast in person at a meeting called for the
purpose of voting on the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect with respect to each Class
until [ , 1999] and thereafter for successive twelve-month
periods with respect to each Class; provided, however, that such
continuance is specifically approved at least annually by the
[Trustees/Directors] of the [Trust/Fund] and by a majority of the
Qualified [Trustees/Directors].
Section 6. Termination.
The Plan may be terminated at any time with respect to a Class
(i) by the [Trust/Fund] without the payment of any penalty, by the
vote of a majority of the outstanding voting securities of such
Class or (ii) by a majority vote of the Qualified
[Trustees/Directors]. The Plan may remain in effect with respect
to a particular Class even if the Plan has been terminated in
accordance with this Section 6 with respect to any other Class.
Section 7. Amendments.
The Plan may not be amended with respect to any Class so as to
increase materially the amounts of the fees described in Section 1
above, unless the amendment is approved by a vote of holders of at
least a majority of the outstanding voting securities of that
Class. No material amendment to the Plan may be made unless
approved by the [Trust's/Fund's] Board of [Trustees/Directors] in
the manner described in Section 4 above.
Section 8. Selection of Certain [Trustees/Directors].
While the Plan is in effect, the selection and nomination of
the [Trust's/Fund's] [Trustees/Directors] who are not interested
persons of the [Trust/Fund] will be committed to the discretion of
the [Trustees/Directors] then in office who are not interested
persons of the [Trust/Fund].
Section 9. Written Reports
In each year during which the Plan remains in effect, any
person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any related agreement
will prepare and furnish to the [Trust's/Fund's] Board of
[Trustees/Directors] and the Board will review, at least
quarterly, written reports complying with the requirements of the
Rule, which set out the amounts expended under the Plan and the
purposes for which those expenditures were made.
Section 10. Preservation of Materials.
The [Trust/Fund] will preserve copies of the Plan, any
agreement relating to the Plan and any report made pursuant to
Section 9 above, for a period of not less than six years (the
first two years in an easily accessible place) from the date of
the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and
"majority of the outstanding voting securities" will be deemed to
have the same meaning that those terms have under the rules and
regulations under the 1940 Act, subject to any exemption that may
be granted to the [Trust/Fund] under the 1940 Act, by the
Securities and Exchange Commission.
Section 12. Limitation of Liability. (Massachusetts business
trusts only)
The obligations of the Trust under this Agreement shall not
be binding upon any of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of
the Trust, individually, but are binding only upon the assets and
property of the Trust, as provided in the Master Trust Agreement.
The execution of this Plan has been authorized by the Trustees and
signed by an authorized officer of the Trust, acting as such, and
neither such authorization by such Trustees nor such execution by
such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally,
but shall bind only the trust property of the Trust as provided in
its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund has executed the Plan as of July
_____, 1998.
[NAME OF TRUST/FUND] On behalf of
By:
____________________________________
Heath B. McLendon
Chairman of the Board
g:\legal\general\forms\agreemts\dist12b1\12b1Plan
Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of
the Investment Company Act of 1940, as amended (the "1940 Act").
The purpose of the Plan is to restate the existing arrangements
previously approved by the Boards of Directors and Trustees of
certain of the open-end investment companies set forth on Schedule
A (the "Funds" and each a "Fund") under the Funds' existing order of
exemption (Investment Company Act Release Nos. 20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the
Funds are distributed pursuant to a system (the "Multiple Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined
below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load structure. In
addition, pursuant to Rule 12b-1 under the 1940 Act (the "Rule"),
the Funds have each adopted a plan (the "Services and Distribution
Plan") under which shares of the Classes are subject to the
services and distribution fees described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and under
the Services and Distribution Plan are subject to a service fee of
up to 0.25% of average daily net assets. In addition, the Funds
are permitted to assess a contingent deferred sales charge
("CDSC") on certain redemptions of Class A shares sold pursuant to
a complete waiver of front-end sales loads applicable to large
purchases, if the shares are redeemed within one year of the date
of purchase. This waiver applies to sales of Class A shares where
the amount of purchase is equal to or exceeds $500,000 although
this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate
of up to 0.25% of average daily net assets and a distribution fee
at an annual rate of up to 0.75% of average daily net assets.
3. Class D Shares
Class D shares are offered without a front-end sales load, CDSC,
service fee or distribution fee.
4. Class L Shares
Class L shares are offered with a front-end load, are subject to a
one-year CDSC and under the Services and Distribution Plan are
subject to a service fee at an annual rate of up to 0.25% of
average daily net assets and a distribution fee at an annual rate
of up to 0.75% of average daily net assets. Unlike Class B
shares, Class L shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
5. Class I Shares
Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee
at an annual rate of up to 0.25% of average daily net assets.
6. Class O Shares
Class O shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and Distribution
Plan are subject to a service fee at an annual rate of up to 0.25%
of average daily net assets and a distribution fee at an annual
rate of up to 0.50% of average daily net assets. Unlike Class B
shares, Class O shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
Effective June 28, 1999, Class O shares will be offered with a
front-end load and will continue to be subject to a one year CDSC,
a service fee at an annual rate of up to 0.25% of average daily
net assets and a distribution fee at an annual rate of up to 0.50%
of average daily net assets.
7. Class Y Shares
Class Y shares are offered without imposition of either a sales
charge or a service or distribution fee for investments where the
amount of purchase is equal to or exceeds a specific amount as
specified in each Fund's prospectus.
8. Class Z Shares
Class Z shares are offered without imposition of either a sales
charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Salomon Smith Barney Inc.
("Salomon Smith Barney") and its affiliates, (ii) by certain unit
investment trusts sponsored by Salomon Smith Barney and its affiliates,
and (iii) although not currently authorized by the governing boards of the
Funds, when and if authorized, (x) by employees of Salomon Smith Barney and
its affiliates and (y) by directors, general partners or trustees of any
investment company listed on Schedule A and, for each of (x) and (y), their
spouses and minor children.
9. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of the
1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund
are allocated among the various Classes of shares based on the net
assets of the Fund attributable to each Class, except that each
Class's net asset value and expenses reflect the expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:
(i) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of
shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services
as required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to
one Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.
Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are borne
on a pro rata basis by each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to
Class A shares after a certain holding period, expected to be, in
most cases, approximately eight years but may be shorter. Upon
the expiration of the holding period, Class B shares (except those
purchases through the reinvestment of dividends and other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services
and Distribution Plan. For purposes of calculating the holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple Class
System are deemed to have been issued on (i) the date on which the
issuance of the Class B shares occurred or (ii) for Class B shares
obtained through an exchange, or a series of exchanges, the date
on which the issuance of the original Class B shares occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B
shares. However, for purposes of conversion to Class A, all Class
B shares in a shareholder's Fund account that were purchased
through the reinvestment of dividends and other distributions paid
in respect of Class B shares (and that have not converted to Class
A shares as provided in the following sentence) are considered to
be held in a separate sub-account. Each time any Class B shares
in the shareholder's Fund account (other than those in the sub-
account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total
Class B shares not acquired through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A and Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under the
Code. The conversion of Class B shares to Class A shares may be
suspended if this opinion is no longer available, In the event
that conversion of Class B shares does not occur, Class B shares
would continue to be subject to the distribution fee and any
incrementally higher transfer agency costs attending the Class B
shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset
value for shares of the same Class in certain other of the Smith
Barney Mutual Funds as set forth in the prospectus for such Fund.
Funds only permit exchanges into shares of money market funds
having a plan under the Rule if, as permitted by paragraph (b) (5)
of Rule 11a-3 under the 1940 Act, either (i) the time period
during which the shares of the money market funds are held is
included in the calculations of the CDSC or (ii) the time period
is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the
Rule by the money market funds with respects to those shares.
Currently, the Funds include the time period during which shares
of the money market fund are held in the CDSC period. The
exchange privileges applicable to all Classes of shares must
comply with Rule 11a-3 under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of October 31, 1998)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Investment Funds Inc. -
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio
U:\legal\funds\slip\1998\secdocs\pea5218f
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 16,874,588
<SHARES-COMMON-PRIOR> 16,000,118
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,026,424
<DISTRIBUTIONS-OF-GAINS> 13,177,093
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,158,346
<NUMBER-OF-SHARES-REDEEMED> 4,466,979
<SHARES-REINVESTED> 1,183,103
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 266,775,240
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> 00.70
<PER-SHARE-GAIN-APPREC> 01.80
<PER-SHARE-DIVIDEND> 00.68
<PER-SHARE-DISTRIBUTIONS> 00.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.52
<EXPENSE-RATIO> 01.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 44,843,556
<SHARES-COMMON-PRIOR> 61,280,779
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32,674,989
<DISTRIBUTIONS-OF-GAINS> 42,026,195
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,252,896
<NUMBER-OF-SHARES-REDEEMED> 21,346,134
<SHARES-REINVESTED> 3,656,015
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 839,830,755
<PER-SHARE-NAV-BEGIN> 15.52
<PER-SHARE-NII> 00.62
<PER-SHARE-GAIN-APPREC> 01.80
<PER-SHARE-DIVIDEND> 00.62
<PER-SHARE-DISTRIBUTIONS> 00.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.49
<EXPENSE-RATIO> 01.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 29,448
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 465
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,433
<NUMBER-OF-SHARES-REDEEMED> 7
<SHARES-REINVESTED> 22
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 197,332
<PER-SHARE-NAV-BEGIN> 17.14
<PER-SHARE-NII> 00.02
<PER-SHARE-GAIN-APPREC> (00.41)
<PER-SHARE-DIVIDEND> 00.00
<PER-SHARE-DISTRIBUTIONS> 00.23
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.52
<EXPENSE-RATIO> 01.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS O
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 535,453
<SHARES-COMMON-PRIOR> 604,050
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 358,988
<DISTRIBUTIONS-OF-GAINS> 462,522
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 94,371
<NUMBER-OF-SHARES-REDEEMED> 207,817
<SHARES-REINVESTED> 44,849
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 9,267,220
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> 00.64
<PER-SHARE-GAIN-APPREC> 01.79
<PER-SHARE-DIVIDEND> 00.63
<PER-SHARE-DISTRIBUTIONS> 00.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.50
<EXPENSE-RATIO> 01.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS Y
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 91
<SHARES-COMMON-PRIOR> 1,585,529
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 250,877
<DISTRIBUTIONS-OF-GAINS> 70,021
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 129,563
<NUMBER-OF-SHARES-REDEEMED> 1,715,009
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 6,031,968
<PER-SHARE-NAV-BEGIN> 15.56
<PER-SHARE-NII> 00.76
<PER-SHARE-GAIN-APPREC> 01.74
<PER-SHARE-DIVIDEND> 00.71
<PER-SHARE-DISTRIBUTIONS> 00.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.52
<EXPENSE-RATIO> 00.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 9
<NAME> SMITH BARNEY BALANCED FUND, CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,074,319,164
<INVESTMENTS-AT-VALUE> 1,107,265,953
<RECEIVABLES> 21,041,296
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 98,231,361
<TOTAL-ASSETS> 1,226,538,610
<PAYABLE-FOR-SECURITIES> 86,700,858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,813,571
<TOTAL-LIABILITIES> 186,514,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,912,614
<SHARES-COMMON-STOCK> 736,988
<SHARES-COMMON-PRIOR> 877,888
<ACCUMULATED-NII-CURRENT> 73,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 222,106,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,931,647
<NET-ASSETS> 1,040,024,181
<DIVIDEND-INCOME> 27,402,427
<INTEREST-INCOME> 33,709,044
<OTHER-INCOME> 61,111,471
<EXPENSES-NET> 15,867,294
<NET-INVESTMENT-INCOME> 45,244,177
<REALIZED-GAINS-CURRENT> 253,609,314
<APPREC-INCREASE-CURRENT> (125,861,240)
<NET-CHANGE-FROM-OPS> 172,992,251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 556,352
<DISTRIBUTIONS-OF-GAINS> 629,957
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99,768
<NUMBER-OF-SHARES-REDEEMED> 314,158
<SHARES-REINVESTED> 73,490
<NET-CHANGE-IN-ASSETS> (207,397,260)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,563,550
<OVERDISTRIB-NII-PRIOR> 3,238
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,097,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,867,294
<AVERAGE-NET-ASSETS> 12,699,236
<PER-SHARE-NAV-BEGIN> 15.55
<PER-SHARE-NII> 00.75
<PER-SHARE-GAIN-APPREC> 01.81
<PER-SHARE-DIVIDEND> 00.71
<PER-SHARE-DISTRIBUTIONS> 00.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.57
<EXPENSE-RATIO> 00.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 6
<NAME> SMITH BARNEY CONVERTIBLE FUND, CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 140,766,137
<INVESTMENTS-AT-VALUE> 140,601,750
<RECEIVABLES> 5,963,826
<ASSETS-OTHER> 8,714,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,280,415
<PAYABLE-FOR-SECURITIES> 96,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,196,419
<TOTAL-LIABILITIES> 9,293,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,262,502
<SHARES-COMMON-STOCK> 2,116,817
<SHARES-COMMON-PRIOR> 2,084,987
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 185,015
<ACCUMULATED-NET-GAINS> 4,074,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,387
<NET-ASSETS> 145,987,151
<DIVIDEND-INCOME> 2,459,377
<INTEREST-INCOME> 5,567,144
<OTHER-INCOME> 0
<EXPENSES-NET> 1,638,748
<NET-INVESTMENT-INCOME> 5,477,773
<REALIZED-GAINS-CURRENT> 7,697,282
<APPREC-INCREASE-CURRENT> 11,026,016
<NET-CHANGE-FROM-OPS> 2,149,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,685,096
<DISTRIBUTIONS-OF-GAINS> 2,701,501
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 187,183
<NUMBER-OF-SHARES-REDEEMED> 366,561
<SHARES-REINVESTED> 211,208
<NET-CHANGE-IN-ASSETS> 33,924,670
<ACCUMULATED-NII-PRIOR> 171,445
<ACCUMULATED-GAINS-PRIOR> 5,462,391
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 665,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,638,748
<AVERAGE-NET-ASSETS> 38,207,621
<PER-SHARE-NAV-BEGIN> 18.61
<PER-SHARE-NII> 00.73
<PER-SHARE-GAIN-APPREC> 00.39
<PER-SHARE-DIVIDEND> 00.79
<PER-SHARE-DISTRIBUTIONS> 01.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.90
<EXPENSE-RATIO> 01.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 6
<NAME> SMITH BARNEY CONVERTIBLE FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 140,766,137
<INVESTMENTS-AT-VALUE> 140,601,750
<RECEIVABLES> 5,963,826
<ASSETS-OTHER> 8,714,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,280,415
<PAYABLE-FOR-SECURITIES> 96,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,196,419
<TOTAL-LIABILITIES> 9,293,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,262,502
<SHARES-COMMON-STOCK> 2,106,579
<SHARES-COMMON-PRIOR> 2,307,764
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 185,015
<ACCUMULATED-NET-GAINS> 4,074,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,387
<NET-ASSETS> 145,987,151
<DIVIDEND-INCOME> 2,459,377
<INTEREST-INCOME> 5,567,144
<OTHER-INCOME> 0
<EXPENSES-NET> 1,638,748
<NET-INVESTMENT-INCOME> 5,477,773
<REALIZED-GAINS-CURRENT> 7,697,282
<APPREC-INCREASE-CURRENT> 11,026,016
<NET-CHANGE-FROM-OPS> 2,149,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,550,568
<DISTRIBUTIONS-OF-GAINS> 2,729,853
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 215,590
<NUMBER-OF-SHARES-REDEEMED> 622,216
<SHARES-REINVESTED> 205,341
<NET-CHANGE-IN-ASSETS> 33,924,670
<ACCUMULATED-NII-PRIOR> 171,445
<ACCUMULATED-GAINS-PRIOR> 5,462,391
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 665,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,638,748
<AVERAGE-NET-ASSETS> 39,265,295
<PER-SHARE-NAV-BEGIN> 18.60
<PER-SHARE-NII> 00.64
<PER-SHARE-GAIN-APPREC> 00.38
<PER-SHARE-DIVIDEND> 00.71
<PER-SHARE-DISTRIBUTIONS> 01.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.89
<EXPENSE-RATIO> 01.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 6
<NAME> SMITH BARNEY CONVERTIBLE FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 140,766,137
<INVESTMENTS-AT-VALUE> 140,601,750
<RECEIVABLES> 5,963,826
<ASSETS-OTHER> 8,714,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,280,415
<PAYABLE-FOR-SECURITIES> 96,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,196,419
<TOTAL-LIABILITIES> 9,293,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,262,502
<SHARES-COMMON-STOCK> 12,436
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 185,015
<ACCUMULATED-NET-GAINS> 4,074,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,387
<NET-ASSETS> 145,987,151
<DIVIDEND-INCOME> 2,459,377
<INTEREST-INCOME> 5,567,144
<OTHER-INCOME> 0
<EXPENSES-NET> 1,638,748
<NET-INVESTMENT-INCOME> 5,477,773
<REALIZED-GAINS-CURRENT> 7,697,282
<APPREC-INCREASE-CURRENT> 11,026,016
<NET-CHANGE-FROM-OPS> 2,149,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,400
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,235
<NUMBER-OF-SHARES-REDEEMED> 2,862
<SHARES-REINVESTED> 63
<NET-CHANGE-IN-ASSETS> 33,924,670
<ACCUMULATED-NII-PRIOR> 171,445
<ACCUMULATED-GAINS-PRIOR> 5,462,391
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 665,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,638,748
<AVERAGE-NET-ASSETS> 200,310
<PER-SHARE-NAV-BEGIN> 17.14
<PER-SHARE-NII> 00.05
<PER-SHARE-GAIN-APPREC> 00.17
<PER-SHARE-DIVIDEND> 00.12
<PER-SHARE-DISTRIBUTIONS> 00.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.90
<EXPENSE-RATIO> 01.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 6
<NAME> SMITH BARNEY CONVERTIBLE FUND, CLASS O
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 140,766,137
<INVESTMENTS-AT-VALUE> 140,601,750
<RECEIVABLES> 5,963,826
<ASSETS-OTHER> 8,714,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,280,415
<PAYABLE-FOR-SECURITIES> 96,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,196,419
<TOTAL-LIABILITIES> 9,293,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,262,502
<SHARES-COMMON-STOCK> 92,315
<SHARES-COMMON-PRIOR> 67,377
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 185,015
<ACCUMULATED-NET-GAINS> 4,074,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,387
<NET-ASSETS> 145,987,151
<DIVIDEND-INCOME> 2,459,377
<INTEREST-INCOME> 5,567,144
<OTHER-INCOME> 0
<EXPENSES-NET> 1,638,748
<NET-INVESTMENT-INCOME> 5,477,773
<REALIZED-GAINS-CURRENT> 7,697,282
<APPREC-INCREASE-CURRENT> 11,026,016
<NET-CHANGE-FROM-OPS> 2,149,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 62,215
<DISTRIBUTIONS-OF-GAINS> 103,280
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37,643
<NUMBER-OF-SHARES-REDEEMED> 21,450
<SHARES-REINVESTED> 8,745
<NET-CHANGE-IN-ASSETS> 33,924,670
<ACCUMULATED-NII-PRIOR> 171,445
<ACCUMULATED-GAINS-PRIOR> 5,462,391
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 665,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,638,748
<AVERAGE-NET-ASSETS> 1,546,997
<PER-SHARE-NAV-BEGIN> 18.58
<PER-SHARE-NII> 00.63
<PER-SHARE-GAIN-APPREC> 00.37
<PER-SHARE-DIVIDEND> 00.71
<PER-SHARE-DISTRIBUTIONS> 01.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.87
<EXPENSE-RATIO> 01.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 6
<NAME> SMITH BARNEY CONVERTIBLE FUND, CLASS Y
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 140,766,137
<INVESTMENTS-AT-VALUE> 140,601,750
<RECEIVABLES> 5,963,826
<ASSETS-OTHER> 8,714,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,280,415
<PAYABLE-FOR-SECURITIES> 96,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,196,419
<TOTAL-LIABILITIES> 9,293,264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,262,502
<SHARES-COMMON-STOCK> 4,291,745
<SHARES-COMMON-PRIOR> 1,558,358
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 185,015
<ACCUMULATED-NET-GAINS> 4,074,051
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,387
<NET-ASSETS> 145,987,151
<DIVIDEND-INCOME> 2,459,377
<INTEREST-INCOME> 5,567,144
<OTHER-INCOME> 0
<EXPENSES-NET> 1,638,748
<NET-INVESTMENT-INCOME> 5,477,773
<REALIZED-GAINS-CURRENT> 7,697,282
<APPREC-INCREASE-CURRENT> 11,026,016
<NET-CHANGE-FROM-OPS> 2,149,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,636,037
<DISTRIBUTIONS-OF-GAINS> 3,558,071
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,733,387
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 33,924,670
<ACCUMULATED-NII-PRIOR> 171,445
<ACCUMULATED-GAINS-PRIOR> 5,462,391
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 665,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,638,748
<AVERAGE-NET-ASSETS> 54,453,217
<PER-SHARE-NAV-BEGIN> 18.66
<PER-SHARE-NII> 00.77
<PER-SHARE-GAIN-APPREC> 00.35
<PER-SHARE-DIVIDEND> 00.84
<PER-SHARE-DISTRIBUTIONS> 01.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.98
<EXPENSE-RATIO> 00.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 10
<NAME> SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 2,856,188,430
<INVESTMENTS-AT-VALUE> 2,883,609,361
<RECEIVABLES> 318,627,228
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 91,763,514
<TOTAL-ASSETS> 2,294,000,103
<PAYABLE-FOR-SECURITIES> 236,700,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,184,079
<TOTAL-LIABILITIES> 334,884,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,948,260,714
<SHARES-COMMON-STOCK> 49,912,365
<SHARES-COMMON-PRIOR> 33,385,804
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 11,253,505
<ACCUMULATED-NET-GAINS> 205,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,902,801
<NET-ASSETS> 2,959,115,638
<DIVIDEND-INCOME> 2,824,140
<INTEREST-INCOME> 220,907,312
<OTHER-INCOME> 0
<EXPENSES-NET> 41,631,721
<NET-INVESTMENT-INCOME> 182,369,731
<REALIZED-GAINS-CURRENT> 77,462,489
<APPREC-INCREASE-CURRENT> (59,024,199)
<NET-CHANGE-FROM-OPS> 200,808,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 24,380,924
<DISTRIBUTIONS-OF-GAINS> 2,345,881
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 35,840,369
<NUMBER-OF-SHARES-REDEEMED> 21,154,188
<SHARES-REINVESTED> 1,840,380
<NET-CHANGE-IN-ASSETS> 67,310,036
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 68,172,759
<GROSS-ADVISORY-FEES> 19,114,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,361,721
<AVERAGE-NET-ASSETS> 340,959,742
<PER-SHARE-NAV-BEGIN> 8.01
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> 0.58
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.96
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 10
<NAME> SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 2,856,188,430
<INVESTMENTS-AT-VALUE> 2,883,609,361
<RECEIVABLES> 318,627,228
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 91,763,514
<TOTAL-ASSETS> 2,294,000,103
<PAYABLE-FOR-SECURITIES> 236,700,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,184,079
<TOTAL-LIABILITIES> 334,884,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,948,260,714
<SHARES-COMMON-STOCK> 285,794,321
<SHARES-COMMON-PRIOR> 304,019,071
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 11,253,505
<ACCUMULATED-NET-GAINS> 205,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,902,801
<NET-ASSETS> 2,959,115,638
<DIVIDEND-INCOME> 2,824,140
<INTEREST-INCOME> 220,907,312
<OTHER-INCOME> 0
<EXPENSES-NET> 41,631,721
<NET-INVESTMENT-INCOME> 182,369,731
<REALIZED-GAINS-CURRENT> 77,462,489
<APPREC-INCREASE-CURRENT> (59,024,199)
<NET-CHANGE-FROM-OPS> 200,808,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 159,933,316
<DISTRIBUTIONS-OF-GAINS> 13,435,329
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55,482,798
<NUMBER-OF-SHARES-REDEEMED> 85,170,973
<SHARES-REINVESTED> 11,463,425
<NET-CHANGE-IN-ASSETS> 67,310,036
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 68,172,759
<GROSS-ADVISORY-FEES> 19,114,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,361,721
<AVERAGE-NET-ASSETS> 2,367,006,969
<PER-SHARE-NAV-BEGIN> 8.03
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.98
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 10
<NAME> SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 2,856,188,430
<INVESTMENTS-AT-VALUE> 2,883,609,361
<RECEIVABLES> 318,627,228
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 91,763,514
<TOTAL-ASSETS> 2,294,000,103
<PAYABLE-FOR-SECURITIES> 236,700,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,184,079
<TOTAL-LIABILITIES> 334,884,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,948,260,714
<SHARES-COMMON-STOCK> 17,005,817
<SHARES-COMMON-PRIOR> 10,427,596
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 11,253,505
<ACCUMULATED-NET-GAINS> 205,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,902,801
<NET-ASSETS> 2,959,115,638
<DIVIDEND-INCOME> 2,824,140
<INTEREST-INCOME> 220,907,312
<OTHER-INCOME> 0
<EXPENSES-NET> 41,631,721
<NET-INVESTMENT-INCOME> 182,369,731
<REALIZED-GAINS-CURRENT> 77,462,489
<APPREC-INCREASE-CURRENT> (59,024,199)
<NET-CHANGE-FROM-OPS> 200,808,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,296,917
<DISTRIBUTIONS-OF-GAINS> 799,273
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,669,210
<NUMBER-OF-SHARES-REDEEMED> 3,784,006
<SHARES-REINVESTED> 693,017
<NET-CHANGE-IN-ASSETS> 67,310,036
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 68,172,759
<GROSS-ADVISORY-FEES> 19,114,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,361,721
<AVERAGE-NET-ASSETS> 109,510,789
<PER-SHARE-NAV-BEGIN> 8.01
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.97
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 10
<NAME> SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND, CLASS Y
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 2,856,188,430
<INVESTMENTS-AT-VALUE> 2,883,609,361
<RECEIVABLES> 318,627,228
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 91,763,514
<TOTAL-ASSETS> 2,294,000,103
<PAYABLE-FOR-SECURITIES> 236,700,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,184,079
<TOTAL-LIABILITIES> 334,884,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,948,260,714
<SHARES-COMMON-STOCK> 15,656,792
<SHARES-COMMON-PRIOR> 10,055,765
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 11,253,505
<ACCUMULATED-NET-GAINS> 205,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,902,801
<NET-ASSETS> 2,959,115,638
<DIVIDEND-INCOME> 2,824,140
<INTEREST-INCOME> 220,907,312
<OTHER-INCOME> 0
<EXPENSES-NET> 41,631,721
<NET-INVESTMENT-INCOME> 182,369,731
<REALIZED-GAINS-CURRENT> 77,462,489
<APPREC-INCREASE-CURRENT> (59,024,199)
<NET-CHANGE-FROM-OPS> 200,808,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,655,580
<DISTRIBUTIONS-OF-GAINS> 735,869
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,598,158
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 2,869
<NET-CHANGE-IN-ASSETS> 67,310,036
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 68,172,759
<GROSS-ADVISORY-FEES> 19,114,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,361,721
<AVERAGE-NET-ASSETS> 102,314,186
<PER-SHARE-NAV-BEGIN> 8.00
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> 0.60
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.96
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 10
<NAME> SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND, CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 2,856,188,430
<INVESTMENTS-AT-VALUE> 2,883,609,361
<RECEIVABLES> 318,627,228
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 91,763,514
<TOTAL-ASSETS> 2,294,000,103
<PAYABLE-FOR-SECURITIES> 236,700,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,184,079
<TOTAL-LIABILITIES> 334,884,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,948,260,714
<SHARES-COMMON-STOCK> 2,721,532
<SHARES-COMMON-PRIOR> 2,545,737
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 11,253,505
<ACCUMULATED-NET-GAINS> 205,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,902,801
<NET-ASSETS> 2,959,115,638
<DIVIDEND-INCOME> 2,824,140
<INTEREST-INCOME> 220,907,312
<OTHER-INCOME> 0
<EXPENSES-NET> 41,631,721
<NET-INVESTMENT-INCOME> 182,369,731
<REALIZED-GAINS-CURRENT> 77,462,489
<APPREC-INCREASE-CURRENT> (59,024,199)
<NET-CHANGE-FROM-OPS> 200,808,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,583,806
<DISTRIBUTIONS-OF-GAINS> 127,912
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 286,159
<NUMBER-OF-SHARES-REDEEMED> 324,497
<SHARES-REINVESTED> 214,133
<NET-CHANGE-IN-ASSETS> 67,310,036
<ACCUMULATED-NII-PRIOR> 218
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 68,172,759
<GROSS-ADVISORY-FEES> 19,114,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,361,721
<AVERAGE-NET-ASSETS> 21,066,576
<PER-SHARE-NAV-BEGIN> 8.01
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> 0.60
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.96
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 5
<NAME> EXCHANGE RESERVE FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 83,444,388
<INVESTMENTS-AT-VALUE> 83,444,388
<RECEIVABLES> 25,552
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 280,070
<TOTAL-ASSETS> 83,750,030
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 248,757
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 248,757
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,535,222
<SHARES-COMMON-STOCK> 74,229,974
<SHARES-COMMON-PRIOR> 103,756,300
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 83,501,273
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,153,629
<OTHER-INCOME> 0
<EXPENSES-NET> 1,322,237
<NET-INVESTMENT-INCOME> 4,831,392
<REALIZED-GAINS-CURRENT> 4,628
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,836,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,670,685
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 319,546,146
<NUMBER-OF-SHARES-REDEEMED> 366,172,777
<SHARES-REINVESTED> 3,892,738
<NET-CHANGE-IN-ASSETS> (39,221,407)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 326,309
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,322,237
<AVERAGE-NET-ASSETS> 100,405,618
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.04
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 5
<NAME> EXCHANGE RESERVE FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 83,444,388
<INVESTMENTS-AT-VALUE> 83,444,388
<RECEIVABLES> 25,552
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 280,070
<TOTAL-ASSETS> 83,750,030
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 248,757
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 248,757
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,535,222
<SHARES-COMMON-STOCK> 9,314,247
<SHARES-COMMON-PRIOR> 8,489,455
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 83,501,273
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,153,629
<OTHER-INCOME> 0
<EXPENSES-NET> 1,322,237
<NET-INVESTMENT-INCOME> 4,831,392
<REALIZED-GAINS-CURRENT> 4,628
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,836,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 482,944
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 352,816,972
<NUMBER-OF-SHARES-REDEEMED> 391,663,064
<SHARES-REINVESTED> 5,264,223
<NET-CHANGE-IN-ASSETS> (39,221,407)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 326,309
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,322,237
<AVERAGE-NET-ASSETS> 8,566,080
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.04
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 8
<NAME> SMITH BARNEY HIGH INCOME FUND, CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,632,646,872
<INVESTMENTS-AT-VALUE> 1,681,778,251
<RECEIVABLES> 83,847,543
<ASSETS-OTHER> 288,266
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,765,914,060
<PAYABLE-FOR-SECURITIES> 9,564,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,749,106
<TOTAL-LIABILITIES> 89,314,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,767,432,463
<SHARES-COMMON-STOCK> 43,619,791
<SHARES-COMMON-PRIOR> 35,865,802
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 7,643,363
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 132,201,561
<ACCUM-APPREC-OR-DEPREC> 49,012,499
<NET-ASSETS> 1,676,600,039
<DIVIDEND-INCOME> 7,680,598
<INTEREST-INCOME> 134,107,331
<OTHER-INCOME> 0
<EXPENSES-NET> 18,909,948
<NET-INVESTMENT-INCOME> 122,877,981
<REALIZED-GAINS-CURRENT> 10,647,989
<APPREC-INCREASE-CURRENT> (14,279,687)
<NET-CHANGE-FROM-OPS> 119,246,283
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 42,085,165
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,998,211
<NUMBER-OF-SHARES-REDEEMED> 17,215,562
<SHARES-REINVESTED> 1,971,340
<NET-CHANGE-IN-ASSETS> 119,246,283
<ACCUMULATED-NII-PRIOR> 873,947
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 199,848,782
<GROSS-ADVISORY-FEES> 7,363,535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,909,948
<AVERAGE-NET-ASSETS> 459,594,141
<PER-SHARE-NAV-BEGIN> 11.82
<PER-SHARE-NII> 01.02
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 01.09
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.74
<EXPENSE-RATIO> 01.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 8
<NAME> SMITH BARNEY HIGH INCOME FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,632,646,872
<INVESTMENTS-AT-VALUE> 1,681,778,251
<RECEIVABLES> 83,847,543
<ASSETS-OTHER> 288,266
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,765,914,060
<PAYABLE-FOR-SECURITIES> 9,564,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,749,106
<TOTAL-LIABILITIES> 89,314,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,767,432,463
<SHARES-COMMON-STOCK> 73,165,807
<SHARES-COMMON-PRIOR> 57,550,302
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 7,643,363
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 132,201,561
<ACCUM-APPREC-OR-DEPREC> 49,012,499
<NET-ASSETS> 1,676,600,039
<DIVIDEND-INCOME> 7,680,598
<INTEREST-INCOME> 134,107,331
<OTHER-INCOME> 0
<EXPENSES-NET> 18,909,948
<NET-INVESTMENT-INCOME> 122,877,981
<REALIZED-GAINS-CURRENT> 10,647,989
<APPREC-INCREASE-CURRENT> (14,279,687)
<NET-CHANGE-FROM-OPS> 119,246,283
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 66,282,175
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,102,567
<NUMBER-OF-SHARES-REDEEMED> 9,879,005
<SHARES-REINVESTED> 2,391,943
<NET-CHANGE-IN-ASSETS> 119,246,283
<ACCUMULATED-NII-PRIOR> 873,947
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 199,848,782
<GROSS-ADVISORY-FEES> 7,363,535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,909,948
<AVERAGE-NET-ASSETS> 758,683,403
<PER-SHARE-NAV-BEGIN> 11.83
<PER-SHARE-NII> 00.96
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 01.03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.75
<EXPENSE-RATIO> 01.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 8
<NAME> SMITH BARNEY HIGH INCOME FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,632,646,872
<INVESTMENTS-AT-VALUE> 1,681,778,251
<RECEIVABLES> 83,847,543
<ASSETS-OTHER> 288,266
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,765,914,060
<PAYABLE-FOR-SECURITIES> 9,564,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,749,106
<TOTAL-LIABILITIES> 89,314,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,767,432,463
<SHARES-COMMON-STOCK> 7,901,476
<SHARES-COMMON-PRIOR> 3,752,857
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 7,643,363
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 132,201,561
<ACCUM-APPREC-OR-DEPREC> 49,012,499
<NET-ASSETS> 1,676,600,039
<DIVIDEND-INCOME> 7,680,598
<INTEREST-INCOME> 134,107,331
<OTHER-INCOME> 0
<EXPENSES-NET> 18,909,948
<NET-INVESTMENT-INCOME> 122,877,981
<REALIZED-GAINS-CURRENT> 10,647,989
<APPREC-INCREASE-CURRENT> (14,279,687)
<NET-CHANGE-FROM-OPS> 119,246,283
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,583,779
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,744,290
<NUMBER-OF-SHARES-REDEEMED> 851,853
<SHARES-REINVESTED> 256,182
<NET-CHANGE-IN-ASSETS> 119,246,283
<ACCUMULATED-NII-PRIOR> 873,947
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 199,848,782
<GROSS-ADVISORY-FEES> 7,363,535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,909,948
<AVERAGE-NET-ASSETS> 62,704,000
<PER-SHARE-NAV-BEGIN> 11.84
<PER-SHARE-NII> 00.97
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 01.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.76
<EXPENSE-RATIO> 01.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 8
<NAME> SMITH BARNEY HIGH INCOME FUND, CLASS Y
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,632,646,872
<INVESTMENTS-AT-VALUE> 1,681,778,251
<RECEIVABLES> 83,847,543
<ASSETS-OTHER> 288,266
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,765,914,060
<PAYABLE-FOR-SECURITIES> 9,564,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,749,106
<TOTAL-LIABILITIES> 89,314,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,767,432,463
<SHARES-COMMON-STOCK> 17,994,904
<SHARES-COMMON-PRIOR> 11,767,040
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 7,643,363
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 132,201,561
<ACCUM-APPREC-OR-DEPREC> 49,012,499
<NET-ASSETS> 1,676,600,039
<DIVIDEND-INCOME> 7,680,598
<INTEREST-INCOME> 134,107,331
<OTHER-INCOME> 0
<EXPENSES-NET> 18,909,948
<NET-INVESTMENT-INCOME> 122,877,981
<REALIZED-GAINS-CURRENT> 10,647,989
<APPREC-INCREASE-CURRENT> (14,279,687)
<NET-CHANGE-FROM-OPS> 119,246,283
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,592,993
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,695,209
<NUMBER-OF-SHARES-REDEEMED> 17,734,768
<SHARES-REINVESTED> 267,423
<NET-CHANGE-IN-ASSETS> 119,246,283
<ACCUMULATED-NII-PRIOR> 873,947
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 199,848,782
<GROSS-ADVISORY-FEES> 7,363,535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,909,948
<AVERAGE-NET-ASSETS> 195,822,148
<PER-SHARE-NAV-BEGIN> 11.84
<PER-SHARE-NII> 01.05
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 01.11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.77
<EXPENSE-RATIO> 00.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 8
<NAME> SMITH BARNEY HIGH INCOME FUND, CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,632,646,872
<INVESTMENTS-AT-VALUE> 1,681,778,251
<RECEIVABLES> 83,847,543
<ASSETS-OTHER> 288,266
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,765,914,060
<PAYABLE-FOR-SECURITIES> 9,564,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,749,106
<TOTAL-LIABILITIES> 89,314,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,767,432,463
<SHARES-COMMON-STOCK> 9,102
<SHARES-COMMON-PRIOR> 8,845
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 7,643,363
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 132,201,561
<ACCUM-APPREC-OR-DEPREC> 49,012,499
<NET-ASSETS> 1,676,600,039
<DIVIDEND-INCOME> 7,680,598
<INTEREST-INCOME> 134,107,331
<OTHER-INCOME> 0
<EXPENSES-NET> 18,909,948
<NET-INVESTMENT-INCOME> 122,877,981
<REALIZED-GAINS-CURRENT> 10,647,989
<APPREC-INCREASE-CURRENT> (14,279,687)
<NET-CHANGE-FROM-OPS> 119,246,283
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,997
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37
<NUMBER-OF-SHARES-REDEEMED> 225
<SHARES-REINVESTED> 445
<NET-CHANGE-IN-ASSETS> 119,246,283
<ACCUMULATED-NII-PRIOR> 873,947
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 199,848,782
<GROSS-ADVISORY-FEES> 7,363,535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,909,948
<AVERAGE-NET-ASSETS> 106,223
<PER-SHARE-NAV-BEGIN> 11.80
<PER-SHARE-NII> 01.04
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 01.11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.74
<EXPENSE-RATIO> 00.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 4
<NAME> SMITH BARNEY MUNICIPAL HIGH INCOME PORTFOLIO, CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 706,461,805
<INVESTMENTS-AT-VALUE> 747,875,993
<RECEIVABLES> 10,548,085
<ASSETS-OTHER> 47,385
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 758,471,463
<PAYABLE-FOR-SECURITIES> 15,123,523
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,113,153
<TOTAL-LIABILITIES> 17,236,676
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,807,310
<SHARES-COMMON-STOCK> 14,922,814
<SHARES-COMMON-PRIOR> 14,030,744
<ACCUMULATED-NII-CURRENT> (1,292,859)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,306,148
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,414,188
<NET-ASSETS> 741,234,787
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,079,790
<OTHER-INCOME> 0
<EXPENSES-NET> 8,954,401
<NET-INVESTMENT-INCOME> 38,125,389
<REALIZED-GAINS-CURRENT> 19,192,567
<APPREC-INCREASE-CURRENT> (10,697,596)
<NET-CHANGE-FROM-OPS> 46,620,360
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,200,396
<DISTRIBUTIONS-OF-GAINS> 3,879,950
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,045,273
<NUMBER-OF-SHARES-REDEEMED> 1,752,808
<SHARES-REINVESTED> 599,605
<NET-CHANGE-IN-ASSETS> (75,324,092)
<ACCUMULATED-NII-PRIOR> (4,147)
<ACCUMULATED-GAINS-PRIOR> 6,985,416
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,655,163
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,954,401
<AVERAGE-NET-ASSETS> 261,862,869
<PER-SHARE-NAV-BEGIN> 18.07
<PER-SHARE-NII> 00.95
<PER-SHARE-GAIN-APPREC> 00.19
<PER-SHARE-DIVIDEND> 00.98
<PER-SHARE-DISTRIBUTIONS> 00.27
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.96
<EXPENSE-RATIO> 00.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 4
<NAME> SMITH BARNEY MUNICIPAL HIGH INCOME PORTFOLIO, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 706,461,805
<INVESTMENTS-AT-VALUE> 747,875,993
<RECEIVABLES> 10,548,085
<ASSETS-OTHER> 47,385
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 758,471,463
<PAYABLE-FOR-SECURITIES> 15,123,523
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,113,153
<TOTAL-LIABILITIES> 17,236,676
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,807,310
<SHARES-COMMON-STOCK> 26,211,866
<SHARES-COMMON-PRIOR> 31,084,397
<ACCUMULATED-NII-CURRENT> (1,292,859)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,306,148
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,414,188
<NET-ASSETS> 741,234,787
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,079,790
<OTHER-INCOME> 0
<EXPENSES-NET> 8,954,401
<NET-INVESTMENT-INCOME> 38,125,389
<REALIZED-GAINS-CURRENT> 19,192,567
<APPREC-INCREASE-CURRENT> (10,697,596)
<NET-CHANGE-FROM-OPS> 46,620,360
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 25,167,878
<DISTRIBUTIONS-OF-GAINS> 7,979,441
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 798,147
<NUMBER-OF-SHARES-REDEEMED> 6,710,099
<SHARES-REINVESTED> 1,039,421
<NET-CHANGE-IN-ASSETS> (75,324,092)
<ACCUMULATED-NII-PRIOR> (4,147)
<ACCUMULATED-GAINS-PRIOR> 6,985,416
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,655,163
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,954,401
<AVERAGE-NET-ASSETS> 512,859,830
<PER-SHARE-NAV-BEGIN> 18.09
<PER-SHARE-NII> 00.86
<PER-SHARE-GAIN-APPREC> 00.19
<PER-SHARE-DIVIDEND> 00.89
<PER-SHARE-DISTRIBUTIONS> 00.27
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.98
<EXPENSE-RATIO> 01.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 4
<NAME> SMITH BARNEY MUNICIPAL HIGH INCOME PORTFOLIO, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 706,461,805
<INVESTMENTS-AT-VALUE> 747,875,993
<RECEIVABLES> 10,548,085
<ASSETS-OTHER> 47,385
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 758,471,463
<PAYABLE-FOR-SECURITIES> 15,123,523
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,113,153
<TOTAL-LIABILITIES> 17,236,676
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,807,310
<SHARES-COMMON-STOCK> 104,112
<SHARES-COMMON-PRIOR> 41,636
<ACCUMULATED-NII-CURRENT> (1,292,859)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,306,148
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,414,188
<NET-ASSETS> 741,234,787
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,079,790
<OTHER-INCOME> 0
<EXPENSES-NET> 8,954,401
<NET-INVESTMENT-INCOME> 38,125,389
<REALIZED-GAINS-CURRENT> 19,192,567
<APPREC-INCREASE-CURRENT> (10,697,596)
<NET-CHANGE-FROM-OPS> 46,620,360
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 45,826
<DISTRIBUTIONS-OF-GAINS> 12,445
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 67,008
<NUMBER-OF-SHARES-REDEEMED> 6,936
<SHARES-REINVESTED> 2,404
<NET-CHANGE-IN-ASSETS> (75,324,092)
<ACCUMULATED-NII-PRIOR> (4,147)
<ACCUMULATED-GAINS-PRIOR> 6,985,416
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,655,163
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,954,401
<AVERAGE-NET-ASSETS> 924,523
<PER-SHARE-NAV-BEGIN> 18.07
<PER-SHARE-NII> 00.87
<PER-SHARE-GAIN-APPREC> 00.16
<PER-SHARE-DIVIDEND> 00.88
<PER-SHARE-DISTRIBUTIONS> 00.27
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.95
<EXPENSE-RATIO> 01.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 11
<NAME> SMITH BARNEY TOTAL RETURN BOND FUND, CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 155,278,428
<INVESTMENTS-AT-VALUE> 156,219,425
<RECEIVABLES> 3,467,363
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,686,788
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,829,514
<TOTAL-LIABILITIES> 2,829,514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 156,189,191
<SHARES-COMMON-STOCK> 4,740,162
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 251,570
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (467,062)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 883,575
<NET-ASSETS> 156,857,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,735,900
<OTHER-INCOME> 0
<EXPENSES-NET> 766,118
<NET-INVESTMENT-INCOME> 2,969,782
<REALIZED-GAINS-CURRENT> (467,062)
<APPREC-INCREASE-CURRENT> 883,575
<NET-CHANGE-FROM-OPS> 3,386,295
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,039,026
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,839,711
<NUMBER-OF-SHARES-REDEEMED> 169,761
<SHARES-REINVESTED> 70,212
<NET-CHANGE-IN-ASSETS> 156,857,274
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 378,792
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 891,092
<AVERAGE-NET-ASSETS> 48,717,204
<PER-SHARE-NAV-BEGIN> 11.46
<PER-SHARE-NII> 00.25
<PER-SHARE-GAIN-APPREC> 00.05
<PER-SHARE-DIVIDEND> 00.23
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.53
<EXPENSE-RATIO> 01.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 11
<NAME> SMITH BARNEY TOTAL RETURN BOND FUND, CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 155,278,428
<INVESTMENTS-AT-VALUE> 156,219,425
<RECEIVABLES> 3,467,363
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,686,788
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,829,514
<TOTAL-LIABILITIES> 2,829,514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 156,189,191
<SHARES-COMMON-STOCK> 7,095,006
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 251,570
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (467,062)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 883,575
<NET-ASSETS> 156,857,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,735,900
<OTHER-INCOME> 0
<EXPENSES-NET> 766,118
<NET-INVESTMENT-INCOME> 2,969,782
<REALIZED-GAINS-CURRENT> (467,062)
<APPREC-INCREASE-CURRENT> 883,575
<NET-CHANGE-FROM-OPS> 3,386,295
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,403,373
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,159,431
<NUMBER-OF-SHARES-REDEEMED> 152,002
<SHARES-REINVESTED> 87,577
<NET-CHANGE-IN-ASSETS> 156,857,274
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 378,792
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 891,092
<AVERAGE-NET-ASSETS> 71,007,311
<PER-SHARE-NAV-BEGIN> 11.46
<PER-SHARE-NII> 00.23
<PER-SHARE-GAIN-APPREC> 00.05
<PER-SHARE-DIVIDEND> 00.21
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.53
<EXPENSE-RATIO> 01.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000764624
<NAME> SMITH BARNEY INCOME FUNDS
<SERIES>
<NUMBER> 11
<NAME> SMITH BARNEY TOTAL RETURN BOND FUND, CLASS L
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 155,278,428
<INVESTMENTS-AT-VALUE> 156,219,425
<RECEIVABLES> 3,467,363
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,686,788
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,829,514
<TOTAL-LIABILITIES> 2,829,514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 156,189,191
<SHARES-COMMON-STOCK> 1,768,216
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 251,570
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (467,062)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 883,575
<NET-ASSETS> 156,857,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,735,900
<OTHER-INCOME> 0
<EXPENSES-NET> 766,118
<NET-INVESTMENT-INCOME> 2,969,782
<REALIZED-GAINS-CURRENT> (467,062)
<APPREC-INCREASE-CURRENT> 883,575
<NET-CHANGE-FROM-OPS> 3,386,295
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 330,595
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,777,314
<NUMBER-OF-SHARES-REDEEMED> 34,200
<SHARES-REINVESTED> 25,102
<NET-CHANGE-IN-ASSETS> 156,857,274
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 378,792
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 891,092
<AVERAGE-NET-ASSETS> 16,066,082
<PER-SHARE-NAV-BEGIN> 11.46
<PER-SHARE-NII> 00.22
<PER-SHARE-GAIN-APPREC> 00.06
<PER-SHARE-DIVIDEND> 00.21
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.53
<EXPENSE-RATIO> 01.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
