As filed with the Securities and Exchange Commission
on February 23, 1999
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. 53
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 54 [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)
[ ] on (date) pursuant to paragraph 485(b)
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[X] on (April 30, 1999) 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
Part A-Prospectus
Part B-Statement of Additional InformationPART C-Other Information
Signature
Exhibits
Part A
<PAGE>
- ------------------------------
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
- ------------------------------
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------
April 30, 1999 PREMIUM TOTAL RETURN FUND
Class A, B, L, O and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Fund goal and strategies..................................................... 4
Risks, performance and expenses.............................................. 5
More on the fund's investments............................................... 8
Management................................................................... 9
Choosing a class of shares to buy............................................ 10
Comparing the fund's classes................................................. 11
Sales charges................................................................ 12
More about deferred sales charges............................................ 15
Buying shares................................................................ 16
Exchanging shares............................................................ 17
Redeeming shares............................................................. 18
Other things to know about
share transactions........................................................ 20
Smith Barney 401(k) and
ExecChoice(TM) programs................................................... 22
Dividends, distributions and
taxes..................................................................... 23
Share price.................................................................. 24
Financial highlights......................................................... 24
</TABLE>
YOU SHOULD KNOW:
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
Premium Total Return Fund 1
<PAGE>
FUND GOAL AND STRATEGIES
INVESTMENT OBJECTIVE
The fund seeks total return (e.g., a combination of long-term capital
appreciation and income).
KEY INVESTMENTS
The fund invests primarily in dividend-paying common stocks of companies with
large market capitalizations, but also may invest in companies with medium and
small market capitalizations. The fund may invest in other equity securities,
including exchange traded and over-the-counter common stocks, and purchase and
sell options on securities and stock indices. The fund may invest up to 20% of
its assets in foreign securities, including American Depository Receipts.
SELECTION PROCESS
The manager emphasizes individual security selection, while diversifying the
fund's investments across industries and sectors. First, the manager uses
quantitative analysis to identify companies with a history of paying dividends.
The manager then attempts to identify the best values available among these
companies. Finally, the manager uses qualitative analysis to evaluate each
company in detail, ranking its management, strategy and competitive market
position.
In selecting individual companies for investment, the manager looks for:
. Consistent and sustainable long-term growth in dividends and earnings per
share
. Low price-to-earnings, price-to-book and price-to-net asset value ratios
. High operating returns relative to invested capital
. Strong cash flow and financial condition
. Competitive products and services (e.g., brand names, barriers to entry and
inventory turnover)
. Improving business trends
2
<PAGE>
RISKS, PERFORMANCE AND EXPENSES
PRINCIPAL RISKS OF INVESTING IN THE FUND
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. The U.S. or foreign stock markets decline generally
. Value stocks fall out of favor with investors
. Companies in which the fund invests fail to meet earnings expectations, or
other events depress their stock prices
. The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect
WHO MAY WANT TO INVEST
The fund may be an appropriate investment if you:
. Are seeking current income and long-term capital appreciation potential
with less risk than an investment in the stock market
. Are looking for an investment with potentially greater return but higher
risk than fixed income investments
. Are willing to accept the risks of the stock market
Premium Total Return Fund 3
<PAGE>
TOTAL RETURN
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[CHART APPEARS HERE]
The bar chart shows the performance of the fund's Class B shares for each of the
past 10 full calendar years. Class A, L, O and Y shares would have different
performance because of their different expenses. The performance information in
the chart does not reflect sales charges, which would reduce your return.
QUARTERLY RETURNS: Highest: xx% in ___ quarter 199X; Lowest: xx% in ___
quarter 199X
COMPARATIVE PERFORMANCE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the
Standard & Poor's 500 Composite Stock Index (the "Index"), a broad-based
unmanaged index of common stocks. This table assumes imposition of the maximum
sales charge applicable to the class, redemption of shares at the end of the
period, and reinvestment of distributions and dividends.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Calendar Years Ended December 31, 1998
Class 1 year 5 years 10 years Since Inception
Inception Date
<S> <C> <C> <C> <C> <C>
A N/A 11/6/92
B 9/16/85
L N/A 6/15/98
O N/A N/A 7/1/93
Y N/A N/A 2/7/96
Index * N/A
</TABLE>
*Index comparison begins on _________________.
4
<PAGE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(paid directly from your investment) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases (as a % 5.00% None 1.00% 1.00% None
of offering price)
Maximum deferred sales charge on None* 5.00% 1.00% 1.00% None
redemptions (as a % of the lower of net asset
value at purchase or redemption)
ANNUAL FUND OPERATING EXPENSES
(paid by the fund as a % of net assets)
Management fee 0.75% 0.75% 0.75% 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 0.75% 1.00% 0.70% None
Other expenses -- -- -- -- --
Total annual fund operating expenses -- -- -- -- --
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial charge) but if you redeem those shares within 12 months of
their purchase, you will pay a deferred sales charge of 1.00%.
EXAMPLE
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without redemption) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class O (redemption at end of period) $ $ $ $
Class O (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
</TABLE>
Premium Total Return Fund 5
<PAGE>
MORE ON THE FUND'S INVESTMENTS
OTHER INVESTMENTS The fund may invest up to 10% of its assets in:
. Fixed income securities of U.S. corporate and governmental issuers
including mortgage-backed and asset-backed securities, Securities
convertible into stocks, including preferred shares and warrants, although
the fund will limit its investments in warrants to 5% of its net assets,
and
. Below investment grade fixed income securities (commonly knows as "junk
bonds").
The price of fixed income securities will go down if interest rates go up,
the credit rating of the security is downgraded or the issuer defaults on its
obligation to pay principal or interest. Below investment grade securities are
considered speculative because they have a higher risk of issuer default, are
subject to greater price volatility and may be illiquid.
FOREIGN SECURITIES Since the fund may invest in securities of foreign issuers,
the fund carries additional risks. Prices of foreign securities may go down
because of foreign government actions, political instability or the more limited
availability of accurate information about foreign companies. Currency
fluctuations could erase investment gains or add to investment losses.
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities or securities indices, for either of the following
purposes:
. To hedge against the economic impact of adverse changes in the market value
of portfolio securities because of changes in stock market prices
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities or
indices. Even a small investment in derivative contracts can have a big impact
on a fund's stock market exposure. Therefore, using derivatives can
disproportionately increase losses and reduce opportunities for gains when stock
prices are changing. The fund may not fully benefit from or may lose money on
derivatives if changes in their value do not correspond accurately to changes in
the value of the fund's holdings. The other parties to certain derivative
contracts present the same types of default risk as issuers of fixed income
securities. Derivatives can also make a fund less liquid and harder to value,
especially in declining markets.
DEFENSIVE INVESTING The fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
- -6-
<PAGE>
MANAGEMENT
MANAGER The fund's investment manager is SSBC Fund Management Inc., an
affiliate of Salomon Smith Barney Inc. The manager's address is 388 Greenwich
Street, New York, New York 10013. The manager selects the fund's investments and
oversees its operations. The manager and Salomon Smith Barney are subsidiaries
of Citigroup Inc. 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.
The fund's sub-investment manager is Boston Partners Asset Management, L.P.
Boston Partners' address is One Financial Center, Boston, Massachusetts 02111.
Boston Partners provides investment management and advisory services to mutual
funds and currently manages over $___ billion.
Harry Rosenbluth, Equity Portfolio Manager of Boston Partners, has been
responsible for the day-to-day management of the fund since August 1995. Mr.
Rosenbluth has 18 years of investment management experience.
MANAGEMENT FEES During the fund's last fiscal year, the manager received an
advisory fee equal to 0.55% of the fund's average daily net assets.
DISTRIBUTOR The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B, L and O shares. Under each plan, the fund pays distribution and
service fees. These fees are an ongoing expense and, over time, they increase
the cost of your investment and may cost you more than other types of sales
charges.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund, which are limited to requesting and receiving reports
from its service providers, or the efforts of its service providers to correct
the problem will be successful.
Premium Total Return Fund -7-
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among five classes of shares: Classes A, B, L, O and Y. Each
class has different sales charges and expenses, allowing you to choose the class
that best meets your needs. Which class is more beneficial to an investor
depends on the amount and intended length of the investment.
. If you plan to invest regularly or in large amounts, buying Class A shares
may help you reduce sales charges and ongoing expenses.
. For Class B shares, all of your purchase amount and, for Class L and Class O
shares, more of your purchase amount (compared to Class A shares) will be
immediately invested. This may help offset the higher expenses of Class B,
Class L and Class O shares, but only if the fund performs well.
. Class L and Class O shares have a shorter deferred sales charge period than
Class B shares. However, because Class B shares convert to Class A shares,
and Class L and Class O shares do not, Class B shares may be more
attractive to long-term investors.
You may buy shares from:
. A Salomon Smith Barney Financial Consultant
. An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
. The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
INVESTMENT MINIMUMS Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
INITIAL ADDITIONAL
-----------------------------------------------------
CLASSES A, B, L, O CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
IRAs $ 250 $15 million $50
Self Employed Retirement Plans, Uniform Gift to
Minor Accounts
-----------------------------------------------------
Qualified Retirement Plans* $ 25 $15 million $25
Simple IRAs $ 1 n/a $ 1
-----------------------------------------------------
Monthly Systematic Investment Plans $ 25 n/a $25
Quarterly Systematic Investment Plans
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k) plans
- -8-
<PAGE>
COMPARING THE FUND'S CLASSES
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS L CLASS O CLASS Y
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEY . Initial sales . No initial . Initial sales . Available for . No initial or
FEATURES charge sales charge charge is lower purchase only deferred sales
. You may . Deferred sales than Class A by former charge
qualify for charge declines . Deferred sales Class C . Must invest
reduction or over time charge for only shareholders at least $15
waiver of . Converts to 1 year . Deferred million
initial sales Class A after 8 . Does not sales charge for . Lower
charge years convert to only 1 year annual
. Lower . Higher annual Class A . Does not expenses than
annual expenses than . Higher convert to the other
expenses Class A annual Class A classes
than Class B, expenses than . Higher
L or O Class A annual
expenses than
Class A
- --------------------------------------------------------------------------------------------------------------------------
INITIAL SALES Up to 5%; None 1.00% 1.00% None
CHARGE reduced or
waived for
large
purchases
and certain
investors.
No charge
for purchases
of $500,000
or more
- --------------------------------------------------------------------------------------------------------------------------
DEFERRED 1% on Up to 5% 1% if you 1% if you None
SALES CHARGE purchases of charged when redeem within redeem within
$500,000 or you redeem 1 year of 1 year of
more if you shares. The purchase purchase
redeem charge is
within 1 year reduced over
of purchase time and there
is no deferred
sales charge
after 6 years
- --------------------------------------------------------------------------------------------------------------------------
ANNUAL 0.25% of 0.75% of average 1.00% of 0.70% of None
DISTRIBUTION average daily daily net assets average daily average daily
AND SERVICE net assets net assets net assets
FEES
- --------------------------------------------------------------------------------------------------------------------------
EXCHANGE- Class A Class B shares Class L shares Class L shares Class Y shares
ABLE INTO* shares of of most Smith of most Smith of most Smith of most Smith
most Smith Barney funds Barney funds Barney funds Barney funds
Barney funds
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Premium Total Return Fund -9-
<PAGE>
SALES CHARGE: CLASS A SHARES
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
<TABLE>
<CAPTION>
----------------------------------------------------------------
SALES CHARGE AS A % OF
OFFERING NET AMOUNT
AMOUNT OF PURCHASE PRICE (%) INVESTED (%)
----------------------------------------------------------------
<S> <C> <C>
Less than $25,000 5.00 5.26
----------------------------------------------------------------
$25,000 but less than $50,000 4.00 4.17
$50,000 but less than $100,000 3.50 3.63
----------------------------------------------------------------
$100,000 but less than $250,000 3.00 3.09
$250,000 but less than $500,000 2.00 2.04
----------------------------------------------------------------
$500,000 or more -0- -0-
----------------------------------------------------------------
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege - lets you combine the current value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- -10-
<PAGE>
Letter of intent - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge, if any, as if
all shares had been purchased at once. You may include purchases on which you
paid a sales charge within 90 days before you sign the letter.
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
. Employees of members of the NASD
. 403(b) or 401(k) retirement plans, if certain conditions are met
. Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn more about the requirements for reductions or waivers of
Class A initial sales charges, contact your Salomon Smith Barney Financial
Consultant or dealer representative or consult the Statement of Additional
Information ("SAI").
Premium Total Return Fund -11-
<PAGE>
SALES CHARGE: CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
6th and
Year after purchase 1st 2nd 3rd 4th 5th over
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 5% 4% 3% 2% 1% 0%
- -------------------------------------------------------------------
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
SHARES ISSUED: SHARES ISSUED: SHARES ISSUED:
AT INITIAL ON REINVESTMENT OF UPON EXCHANGE FROM
PURCHASE DIVIDENDS AND ANOTHER SMITH BARNEY
DISTRIBUTIONS FUND
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total Class B have converted into Class A
shares you own shares
- ----------------------------------------------------------------------------------------
</TABLE>
SALES CHARGE: CLASS L AND O SHARES
You buy Class L or O shares at the offering price, which is the net asset value
plus a sales charge of 1% (1.01% of the net amount invested). In addition, if
you redeem your Class L or O shares within one year of purchase, you will pay a
deferred sales charge of 1%. If you held Class C shares of any Smith Barney fund
on June 12, 1998, you will not pay an initial sales charge on Class L shares of
the fund you may buy before June 22, 2001.
You may buy Class O shares only if you owned Class C shares of the fund on June
12, 1998. You will not pay an initial sales charge on Class O shares you buy
before June 22, 2001.
SALES CHARGE: CLASS Y SHARES
You Buy Class Y Shares At Net Asset Value With No Initial Sales Charge And No
Deferred Sales Charge When You Redeem. You Must Meet The $15,000,000 Initial
Investment Requirement. You Can Use A Letter Of Intent To Meet This Requirement
By Buying Class Y Shares Of The Fund Over A 6-month Period. To Qualify, You
Must Initially Invest $5,000,000.
- -12-
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney fund
. Shares representing reinvested distributions and dividends
. Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
DEFERRED SALES CHARGE WAIVERS
The deferred sales charge for each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. On certain distributions from a retirement plan
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Premium Total Return Fund -13-
<PAGE>
BUYING SHARES
Through a You should contact your Salomon Smith Barney Financial Consultant
Salomon or dealer representative to open a brokerage account and make
Smith arrangements to buy shares.
Barney
Financial If you do not provide the following information, your order will
consultant be rejected
Or dealer . class of shares being bought
represen- . dollar amount or number of shares being bought
tative You should pay for your shares through your brokerage account no
later than the third business day after you place your order.
Salomon Smith Barney or your dealer representative may charge an
annual account maintenance fee.
- --------------------------------------------------------------------------------
Through the Qualified retirement plans and certain other investors who are
fund's clients of the selling group are eligible to buy shares directly
transfer from the fund.
agent
. Write the transfer agent at the following address:
Smith Barney Income Funds
Premium Total Return Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
. Enclose a check to pay for the shares. For initial purchases,
complete and send an account application.
. For more information, call the transfer agent at 1-800-451-
2010.
- --------------------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your dealer
systematic representative or the transfer agent to transfer funds
investment automatically from a regular bank account, cash held in a
plan Salomon Smith Barney brokerage account or Smith Barney Money
market fund to buy shares on a regular basis.
. Amounts transferred should be at least: $25 monthly or $50
quarterly
. If you do not have sufficient funds in your account on a
transfer date, Salomon Smith Barney, your dealer representative
or the transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or
consult the SAI.
- -14-
<PAGE>
EXCHANGING SHARES
Smith You should contact your Salomon Smith Barney Financial
Barney offers Consultant or dealer representative to exchange into other
a distinctive Smith Barney Funds. Be sure to read the prospectus of the Smith
family of Barney Fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the . You may exchange shares only for shares of the same class of
varying another Smith Barney fund. Class O shares may be exchanged for
needs of both Class L shares of another Smith Barney fund. Not all
large and Smith Barney funds offer all classes.
small
investors. . Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon Smith Barney Financial
Consultant,
dealer representative or the transfer agent.
. You must meet the minimum investment amount for each fund.
. If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers (documents transferring ownership of certificates)
before the exchange is effective.
. The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be
measured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you will
be subject to that charge. If you exchange at any time into a
fund with a lower charge, the sales charge will not be reduced.
- --------------------------------------------------------------------------------
By telephone If you do not have a brokerage account, you may be eligible to
exchange shares through the transfer agent. You must complete
an authorization form to authorize telephone transfers. If
eligible, you may make telephone exchanges on any day the New
York Stock Exchange is open. Call the transfer agent at 1-800-
451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time).
Requests received after the close of regular trading on the
Exchange are priced at the net asset value next determined.
You can make telephone exchanges only between accounts that
have identical registrations.
- --------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the opposite page.
Premium Total Return Fund -15-
<PAGE>
REDEEMING SHARES
GENERALLY Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However, if
you recently purchased your shares by check, your redemption
proceeds will not be sent to you until your original check
clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
BY MAIL For accounts held directly at the fund, send written
requests to the transfer agent at the following address:
Smith Barney Income Funds
Premium Total Return Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
. Your account number
. The class of shares and the dollar amount or number of
shares to be redeemed
. Signatures of each owner exactly as the account is
registered
16
<PAGE>
BY TELEPHONE If you do not have a brokerage account, you may be eligible to
redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent. You
must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by
telephone on any day the New York Stock Exchange is open. Call
the transfer agent at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m. (Eastern time). Requests received after the close of
regular trading on the Exchange are priced at the net asset
value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You may be charged a fee for wire
transfers. You must submit a new authorization form to change
the bank account designated to receive wire transfers and you
may be asked to provide certain other documents.
- --------------------------------------------------------------------------------
AUTOMATIC CASH You can arrange for the automatic redemption of a portion of
WITHDRAWAL PLANS your shares on a monthly or quarterly basis. To qualify you
must own shares of the fund with a value of at least $10,000
and each automatic redemption must be at least $50. If your
shares are subject to a deferred sales charge, the sales
charge will be waived if your automatic payments do not exceed
1% per month of the value of your shares subject to a deferred
sales charge.
The following conditions apply:
. Your shares must not be represented by certificates
. All dividends and distributions must be reinvested
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.
Premium Total Return Fund 17
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed.
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed M Dollar amount
or number of shares being bought, exchanged or redeemed
. Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
SIGNATURE GUARANTEES To be in good order, your redemption request must include
a signature guarantee if you:
. Are redeeming (together with other requests submitted in the previous 10
days) over $10,000 of shares
. Are sending signed share certificates or stock powers to the transfer agent
. Instruct the transfer agent to mail the check to an address different from
the one on your account
. Changed your account registration
. Want the check paid to someone other than the account owner(s)
. Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
18
<PAGE>
The fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
. Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
. Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
SHARE CERTIFICATES The fund does not issue share certificates unless a written
request is made to the transfer agent. If you hold share certificates it will
take longer to exchange or redeem shares.
Premium Total Return Fund 19
<PAGE>
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice(TM) program. The fund offers Class A, Class L and, in
limited circumstances, Class O shares to participating plans as investment
alternatives under the programs. You can meet minimum investment and exchange
amounts by combining the plan's investments in any of the Smith Barney mutual
funds.
There are no sales charges when you buy or sell shares and the class of shares
you may purchase depends on the amount of your initial investment. Once a class
of shares is chosen, all additional purchases must be of the same class.
. Class A shares may be purchased by plans investing at least $1 million.
. Class L shares may be purchased by plans investing less than $1 million.
Class O shares may be purchased by plans investing less than $1 million if the
plan opened its account on or before June 12, 1998. Class L and O shares are
eligible for exchange to Class A shares not later than 8 years after the plan
joined the program. They are eligible for conversion sooner in the following
circumstances:
If the account was opened on or after June 21, 1996 and a total of
$1 million is invested in Smith Barney Funds Class L and O shares
(other than money market funds), all Class L and O shares are
eligible for exchange after the plan is in the program 5 years.
If the account was opened before June 21, 1996 and a total of
$500,000 is invested in Smith Barney Funds Class L and O shares
(other than money market funds) on December 31 in any year, all
Class L and O shares are eligible for exchange on or about March 31
of the following year.
For more information, call your Salomon Smith Barney Financial Consultant or the
transfer agent, or consult the SAI.
20
<PAGE>
DISTRIBUTIONS, DIVIDENDS AND TAXES
DIVIDENDS. The fund pays dividends, if any, each quarter from its net investment
income. In addition, the fund pays, if any, capital gains distributions. The
fund may pay additional distributions and dividends at other times if
necessary for the fund to avoid a federal tax. Capital gain distributions
and dividends are reinvested in additional fund shares of the same class
you hold. The fund expects distributions to be primarily from capital gains.
You do not pay a sales charge on reinvested distributions or
TAXES In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
- --------------------------------------------------------------------------------
TRANSACTION FEDERAL TAX STATUS
Redemption or exchange of shares Usually capital gain or loss;
dividend is paid.
TAXES In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
- --------------------------------------------------------------------------------
TRANSACTION FEDERAL TAX STATUS
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned more
than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
- --------------------------------------------------------------------------------
Any taxable dividends and capital gains are taxable whether received in cash or
reinvested in fund shares. Long-term capital gain distributions are taxable to
you as long-term capital gain regardless of how long you have owned your shares.
You may want to avoid buying shares when the fund is about to declare a capital
gain distribution or a dividend, because it will be taxable to you even though
it may actually be a return of a portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
Premium Total Return Fund 21
<PAGE>
SHARE PRICE
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. The fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When reliable market prices are
not readily available, or when the value of a security has been materially
affected by events occurring after a foreign exchange closes, the fund may price
those securities at fair value. Fair value is determined in accordance with
procedures approved by the fund's board. A fund that uses fair value to price
securities may value those securities higher or lower than another fund that
uses market quotations to price the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables (except for the fiscal year ended December
31, 1994) was audited by KPMG LLP, independent accountants, whose report, along
with the fund's financial statements, are included in the annual report
(available upon request). The information for the fiscal year ended December 31,
1994 has been audited by another independent accountant.
22
<PAGE>
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED DECEMBER 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997(1) 1996(1)(2) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $19.14 $17.40 $16.33 $15.69 $15.65
BEGINNING OF YEAR
- ----------------------------------------------------------------------------------------------------
INCOME FROM
OPERATIONS:
Net investment income 0.39 0.16 0.37 0.44 0.33
Net realized and 4.29 2.21 1.98 1.48 0.99
unrealized gains
- ---------------------------------------------------------------------------------------------------
Total Income From 4.68 2.37 2.35 1.92 1.32
Operations
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
FROM:
Net investment (0.38) (0.16) (0.37) (0.43) (0.55)
income
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52)
Capital -- -- -- (0.71) (0.21)
- ----------------------------------------------------------------------------------------------------
Total Distributions (1.63) (0.63) (1.28) (1.28) (1.28)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, $22.19 $19.14 $17.40 $16.33 $15.69
END OF YEAR
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 25.19% 13.80%(3) 14.76% 12.92% 8.65%
- ----------------------------------------------------------------------------------------------------
NET ASSETS, END OF $834 $608 $534 $472 $68
YEAR (MILLIONS)
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.11% 1.12%(4) 1.12% 1.16% 1.19%
Net investment 1.89 2.05(4) 2.16 2.81 2.05
income
- ----------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 43% 30% 58% 63% 34%
RATE
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts calculated using the monthly average shares method (2) For
the period from August 1, 1996 to December 31, 1996.
(3) Not annualized.
(4) Annualized.
Premium Total Return Fund 23
<PAGE>
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED DECEMBER 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997(1) 1996(1)(2) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.14 $17.40 $16.33 $15.69 $15.65
- ---------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.29 0.12 0.28 0.36 0.25
Net realized and unrealized gains 4.28 2.21 1.99 1.48 1.00
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 4.57 2.33 2.27 1.84 1.25
- ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.29) (0.12) (0.29) (0.34) (0.49)
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52)
Capital -- -- -- (0.72) (0.20)
- ---------------------------------------------------------------------------------------------------
Total Distributions (1.54) (0.59) (1.20) (1.20) (1.21)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.17 $19.14 $17.40 $16.33 $15.69
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN 24.55% 13.57%(3) 14.21% 12.36% 8.12%
- ---------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $3,170 $2,355 $2,021 $1,655 $1,697
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.60% 1.54%(4) 1.62% 1.66% 1.66%
Net investment income 1.39 1.63 (4) 1.66 2.31 1.58
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 43% 30% 58% 63% 34%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) Not annualized.
(4) Annualized.
- -24-
<PAGE>
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE YEAR ENDED
DECEMBER 31:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1998(1)
------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR
------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income
Net realized and unrealized gains
------------------------------------------------------------------------------------
Total Income From Operations
------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
Net realized gains
Capital
------------------------------------------------------------------------------------
Total Distributions
------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR
------------------------------------------------------------------------------------
TOTAL RETURN
------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)
------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
------------------------------------------------------------------------------------
</TABLE>
(1) For the period from ______________to December 31, 1998.
Premium Total Return Fund -25-
<PAGE>
FOR A CLASS O SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED DECEMBER 31:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
1998 1997(1) 1996(1)(2) 1996 1995 1994(3)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.15 $17.41 $16.33 $15.69 $15.65
-------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.30 0.12 0.29 0.36 0.23
Net realized and unrealized gains 4.28 2.21 1.99 1.48 1.02
-------------------------------------------------------------------------------------------------------
Total Income From Operations 4.58 2.33 2.28 1.84 1.25
-------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.30) (0.12) (0.29) (0.35) (0.49)
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52)
Capital -- -- -- (0.71) (0.20)
-------------------------------------------------------------------------------------------------------
Total Distributions (1.55) (0.59) (1.20) (1.20) (1.21)
-------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.18 $19.15 $17.41 $16.33 $15.69
-------------------------------------------------------------------------------------------------------
TOTAL RETURN 24.60% 13.58%(4) 14.30% 12.36% 8.12%
-------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $ 94 $ 43 $ 31 $ 13 $ 2
-------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.56% 1.55%(5) 1.59% 1.62% 1.60%
Net investment income 1.41 1.61 (5) 1.68 2.35 1.65
-------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 43% 30% 58% 63% 34%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) On November 7, 1994 the former Class D shares were renamed Class C shares.
(4) Not annualzied.
(5) Annualized.
- -26-
<PAGE>
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR
ENDED DECEMBER 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1998 1997(1) 1996(1)(2) 1996(3)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.17 $17.42 $17.57
- --------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.47 0.17 0.19
Net realized and unrealized gains 4.29 2.23 0.33
- --------------------------------------------------------------------------------------------
Total Income From Operations 4.76 2.40 0.52
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.44) (0.18) (0.21)
Net realized gains (1.25) (0.47) (0.46)
- --------------------------------------------------------------------------------------------
Total Distributions (1.69) (0.65) (0.67)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.24 $19.17 $17.42
- --------------------------------------------------------------------------------------------
TOTAL RETURN 25.61 % 13.95%(4) 2.93%(4)
- --------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $51 $27 $13
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.76 % 0.80%(5) 0.87%(5)
Net investment income 2.22 2.36 (5) 2.24 (5)
- --------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 43 % 30% 58%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) For the period from February 7, 1996 (inception date) to July 31, 1996.
(4) Not annualized.
(5) Annualized.
Premium Total Return Fund -27-
<PAGE>
SALOMON SMITH BARNEY(SM)
A MEMBER OF CITIGROUP [SYMBOL]
PREMIUM TOTAL RETURN FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE. Our web site is located at www.smithbarney.com
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference Section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained by
calling 1-800-SEC-0330. You can get the same information free from the
Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(SM)Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Part B
Smith Barney
INCOME FUNDS - SMITH BARNEY PREMIUM TOTAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information
April 30, 1999
This Statement of Additional Information ("SAI") is meant to be read in
conjunction with the prospectus of the Smith Barney Premium Total Return
Fund (the "fund") dated April 30, 1999, as amended or supplemented from
time to time (the "Prospectus"), and is incorporated by reference in its
entirety into the prospectus. Additional information about the fund's
investments is available in the fund's annual and semi-annual reports to
shareholders which are incorporated herein by reference. The prospectus
and copies of the reports may be obtained free of charge by contacting a
Salomon Smith Barney Financial Consultant, or by writing or calling
Salomon Smith Barney at the address or telephone number above. The fund
is a separate investment series of Smith Barney Income Funds (the
"trust").
This SAI is not a prospectus. It is intended to provide more detailed
information about the fund as well as matters already discussed in the
Prospectus and therefore should be read in conjunction with the
Prospectus dated April 30, 1999, which may be obtained from the fund or
your Salomon Smith Barney Financial Consultant.
TABLE OF CONTENTS
Trustees and Executive Officers of the Trust................................2
Investment Objectives and Management Policies..............................5
Purchase, Exchange and Redemption of Shares................................19
Distributor................................................................31
Valuation of Shares........................................................33
Performance Data...........................................................33
Taxes......................................................................37
Additional Information....................................................41
Financial Statements.......................................................42
Appendix A.................................................................43
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The names of the trustees of the trust and executive officers of the
fund, together with information as to their principal business
occupations, are set forth below. The executive officers of the fund
are employees of organizations that provide services to the fund. 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. The address of the "non-interested" trustees
and the executive officers of the fund is 388 Greenwich Street, New
York, New York 10013.
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; formerly
Headmaster, The Peck School, Morristown, New Jersey; prior to July 1,
1994, Headmaster, Lawrence Country Day School-Woodmere Academy,
Woodmere, New York. His address is 58 Ivy Chase, Atlanta, Georgia
30342.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
65). Managing Director of Salomon Smith Barney Inc. ("Salomon Smith
Barney"), Chairman of the Board and President of SSBC Fund Management
Inc. ("SSBC") (formerly known as Mutual Management Corp.) and Travelers
Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the Board
of 59 investment companies associated with Salomon Smith Barney; and
former Chairman of the Board of Smith Barney Strategy Advisers Inc.
Harry Rosenbluth, Investment Officer (Age 44). Equity Portfolio Manager
of Boston Partners Asset Management, L.P. ("Boston Partners") and Member
of the Equity Strategy Committee; prior to 1995, Senior Vice President
and Equity Portfolio Manager of The Boston Company Advisors. His
address is 100 Drakes Landing Road, Suite 360 Greenbrae, California
94904.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney, Chief Financial Officer of
the Smith Barney Mutual Funds; Director and Senior Vice President of
SSBC and TIA.
Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon
Smith Barney; General Counsel and Secretary of SSBC and TIA.
As of February 16, 1999, the Trustees and officers of the fund, as a
group, owned less than 1% of the outstanding shares of beneficial
interest of the fund. As of February 16, 1999, to the best knowledge of
the fund and the Board the following shareholders or "groups" (as that
term is used in Section 13 (d) of the Securities Act of 1934, as
amended) beneficially owned more than 5% of the outstanding shares of
the following Class:
Class Y Percentage
Smith Barney 66.5527
Concert Series, Inc.
Balanced Portfolio PNC Bank, N.A.
Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Smith Barney 16.3771
Concert Series, Inc.
Select Balanced Portfolio
PNC Bank Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Smith Barney 8.8621
Concert Series, Inc.
Conservative Port. PNC Bank, N.A.
Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
No officer, Trustee 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, on
behalf of the fund and the other series of 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 $3,000 per year plus $500 per meeting
attended, and reimburses them for travel and out-of-pocket expenses.
For the fiscal year ended December 31, 1998, such travel and out-of-
pocket expenses totaled $2,862.93.
For the fiscal year ended and the calendar year ended December 31, 1998,
the Trustees of the trust were paid the following compensation with
respect to the fund:
Trustee(*)
Aggregate
Compensation from
the Fund for the
Fiscal Year ended
December 31, 1998
Total
Pension or
Retirement
Benefits
Accrued from
the Fund
Aggregate
Compensation from
the Fund and the
Fund Complex for
the Year ended
December 31, 1998
Lee Abraham (9)
$5,570
$0
$47,750
Allan J. Bloostein
(15)
5,540
0
90,500
Richard E. Hanson, Jr.
(9)
5,590
0
47,950
Heath B. McLendon (59)
0
0
0
(*) Number of directorships/trusteeships held with other Smith Barney
Mutual Funds.
Investment Adviser, Sub-Investment Adviser and Administrator
SSBC serves as investment adviser to the fund pursuant to a written
agreement with the fund (an "Advisory Agreement"). SSBC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
The Advisory Agreement was most recently approved by the Board of
Trustees, including a majority of the Trustees who are not "interested
persons" of the trust or the Investment Adviser ("Independent
Trustees"), on December 4, 1998. SSBC serves as administrator to the
fund pursuant to a separate written agreement dated August 31, 1995 (the
"Administration Agreement") which was most recently approved by the
Board of Trustees, including a majority of the Independent Trustees, on
August 5, 1998. Boston Partners serves as a sub-investment adviser to
the fund, pursuant to a written agreement dated December 1, 1997.
The Investment Adviser, Sub-Investment Adviser and Administrator pay the
salaries of all officers and employees who are employed by both it and
the trust, and maintain office facilities for the trust. In addition to
those services, the Investment Adviser 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
fund's shareholders and prepares tax returns, reports to and filings
with the Securities and Exchange Commission (the "SEC") and state Blue
Sky authorities. The Investment Adviser and Sub-Investment Adviser bear
all expenses in connection with the performance of their services.
As compensation for investment advisory services, the fund pays the
Investment Adviser a fee computed daily and paid monthly at the annual
rate of 0.55% of the value of the fund's average daily net assets. As
compensation for sub-advisory services, the Investment Adviser pays the
Sub-Investment Adviser 0.15%, a fee that is computed daily and paid
monthly based on the value of the fund's average daily net assets.
For the periods below, the fund paid investment advisory fees to its
Investment Adviser as follows:
For the
Period from
August 1,
1996 through
December 31,
1996
For the
Fiscal
1996*
Year Ended
1997
December 31:
1998
$6,454,801
$13,381,076
$19,865,93
5
$
*Figures are for the period ended July 31.
As compensation for administrative services, the 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 fund paid administrative fees to SSBC or Mutual Management
Corp., the fund's predecessor administrator, as follows:
For the
Period from
August 1,
1996
through
December
31, 1996
For the
Fiscal
1996*
Year Ended
1997
December 31:
1998
$2,347,201
$2,299,999*
$7,223,977
$
*Figures are for the period ended July 31.
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 one of its affiliates, 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 LLP, 345 Park Avenue, New York, New York 10154 has been selected as
the fund's independent auditor to examine and report on the fund's
financial statements and highlights for the fiscal year ending December
31, 1999.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Investment Objectives and Policies
The fund's investment objective is total return. 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 objective. The fund will seek to achieve its
objective by investing primarily in a diversified portfolio of dividend-
paying common stocks. The fund may engage in various portfolio
strategies involving options to seek to increase its return and to hedge
its portfolio against movements in the equity markets and interest
rates. Because the fund seeks total return by emphasizing investments
in dividend-paying common stocks, it will not have as much investment
flexibility as total return funds which may pursue their objective by
investing in both income and equity stocks without such an emphasis.
The fund also may invest up to 10% of its assets in: (a) medium- or
low-rated securities or unrated securities of comparable quality.
Medium- and low-rated securities are securities rated less than
investment grade by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"). See "Medium-,
Low- and Unrated Securities"; (b) interest-paying debt securities, such
as obligations issued or guaranteed as to principal and interest by the
United States government; and (c) other securities, including
convertible bonds, convertible preferred stock and warrants. In
addition, the fund will limit its investments in warrants to 5% of its
net assets. The fund also may lend its portfolio securities and enter
into "short sales against the box." Special considerations associated
with the fund's investment strategies are described below.
Certain Investment Strategies
In attempting to achieve its investment objective, the fund may employ,
among others, one or more of the strategies set forth below.
Short Sales Against the Box. The fund 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. The 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 the 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 fund will deposit, in a
segregated account with its custodian, convertible preferred stock or
convertible debt securities in connection with short sales against the
box.
Covered Option Writing. The fund may write put and call options on
securities. The fund realizes 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.
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 option exercise
price, less the premium received for writing the option.
The fund will write only covered options. Accordingly, whenever the
fund writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains
obligated as the writer of the option. To support its obligation to
purchase the underlying security if a put option is exercised, the fund
will either (a) deposit with PNC Bank, National Association ("PNC Bank")
in a segregated account cash or equity and debt securities of any grade
provided such securities have been determined by the Investment Adviser
or Sub-Investment Adviser to be liquid and unencumbered pursuant to
guidelines established by the Trustees, having a value at least equal to
the exercise price of the option or (b) continue to own an equivalent
number of 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 on the same underlying security with exercise
prices equal to or greater than those that it has written (or, if the
exercise prices of the puts it holds are less than the exercise prices
of those that it has written, it will deposit the difference with PNC
Bank in a segregated account).
Purchasing Put and Call Options on Securities. The fund may utilize up
to 10% of its assets to purchase put options on portfolio securities and
may do so at or about the same time 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 market value of the security until the put expires.
Any appreciation in the value of, or in the yield otherwise available
from the underlying security, however, will be partially offset by the
amount of the premium paid for the put option and any related
transaction costs. The fund may utilize up to 10% of its assets to
purchase call options on portfolio securities. Call options may be
purchased by the fund in order to acquire the underlying securities for
the fund at a price that avoids any additional cost that would result
from a substantial increase in the market value of a security. The fund
also may purchase call options to increase its return to investors at a
time when the call is expected to increase in value due to anticipated
appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the fund, prior to the exercise of options
it has purchased, of options of the same series), and profit or loss
from the sale will depend on whether the amount received is more or less
than the premium paid for the option plus the related transaction costs.
More About Options on Securities. Although the fund generally will
purchase or write only those options for which its Investment Adviser or
Sub-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 Options Clearing Corporation (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 the 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 the fund, other clients of the Investment
Adviser 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, the 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 U.S. government
securities for which the fund may write covered call options. If the
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. The fund may purchase and write exchange-listed
put and call options on stock indexes primarily to hedge against the
effects of market-wide price movements. A stock index measures the
movement of a certain group of stocks by assigning relative values to
the common stocks included in the index. Examples of well-known stock
indexes are the Standard & Poor's Daily Price Index of 500 Common Stocks
and the NYSE Composite Index. 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 securities.
However,(a) because options on stock indexes do not involve the delivery
of an underlying security, the option represents the holder's right to
obtain from the writer in cash a fixed multiple of the amount by which
the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying index on the
exercise date, (b) the expiration cycles of stock index options are
monthly, while those of stock options are currently quarterly and (c)
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.
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
fund will realize 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 the fund of options on
stock indexes will be subject to the ability of the Investment Adviser
and/or Sub-Investment Adviser 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 fund will engage in stock index options transactions only when such
a strategy is determined by the Investment Adviser or Sub-Investment
Adviser to be consistent with the fund's 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 the 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.
Additional Investments
Foreign Securities and American Depositary Receipts. The fund may
invest up to 20% of its assets in foreign securities and 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 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 which could affect U.S. investments
in foreign countries and potential restrictions on the flow of
international capital. Additionally, dividends or interest payable on
foreign securities, and in some cases capital gains, may be subject to
foreign withholding or other foreign taxes. 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 U.S. dollars. Many of
the foreign securities held by the fund will not be registered with, nor
will the issuers thereof be subject to the reporting requirements of,
the SEC. Accordingly, there may be less publicly available information
about the securities and the foreign company or government issuing them
than is available about a domestic company or government entity.
Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions.
Money Market Instruments. When the Investment Adviser or Sub-Investment
Adviser believes that market conditions warrant, the fund may adopt a
temporary defensive posture and invest in short-term instruments without
limitation. Short-term instruments in which the fund may invest include
U.S. government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and
similar institutions); commercial paper rated no lower than A-2 by S&P
or Prime-2 by Moody's or the equivalent from another major rating
service or, if unrated, of an issuer having an outstanding unsecured
debt 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 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 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 Investment Adviser or Sub-Investment Adviser, 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.
U.S. Government Securities. 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 (such as Treasury
Bills, Treasury Notes and Treasury Bonds), 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, 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, the fund
will invest in obligations issued by such an instrumentality only if its
Investment Adviser or Sub-Investment Adviser determines that the credit
risk with respect to the instrumentality does not make its securities
unsuitable for investment by the fund. 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.
Bank Obligations. 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 the 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 applicable 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, the
fund's Investment Adviser or Sub-Investment Adviser will carefully
evaluate such investments on a case-by-case basis.
Ratings as Investment Criteria In general, the ratings of NRSROs
represent the opinions of these agencies as to the quality of securities
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 fund as
initial criteria for the selection of portfolio securities, but the fund
also will rely upon the independent advice of its Investment Adviser
and/or Sub-Investment Adviser 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 SAI contains further information concerning the rating
categories of NRSROs and their significance.
Subsequent to its purchase by the 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
the 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
the ratings change as a result of changes in such organizations or their
rating systems, or because of a corporate reorganization, the 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. To secure an
advantageous price or yield, the fund may purchase certain securities on
a when-issued basis or purchase or sell securities for delayed delivery.
The 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 the 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, the 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 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 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 the 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. The fund has the ability to lend
portfolio securities to brokers, dealers and other financial
organizations. Such loans, if and when made, may not exceed 20% of the
fund's total assets taken at value. The 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, the 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, the fund can increase its income by
continuing to receive interest or dividends 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. The
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 the fund's Investment Adviser or Sub-Investment Adviser to be
of good standing and will not be made unless, in the judgment of the
Investment Adviser or Sub-Investment Adviser, the consideration to be
earned from such loans would justify the risk.
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.
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 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 rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay
principal. Securities 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 rated Caa or CCC
are of poor standing. These issues may be in default or present
elements of danger with respect to principal or interest.
In light of the risks described above, the Investment Adviser or Sub-
Investment Adviser 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 significant operating history and be dependent on products or
services without an established market share.
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 not
readily marketable, including (a) repurchase agreements with maturities
greater than seven days, (b) time deposits maturing from two business
days through seven calendar days and (c) to the extent that a liquid
secondary market does not exist for the instruments, futures contracts
and options thereon. 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 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.
Investment Restrictions
The trust has adopted investment restrictions 1 through 7 below as
fundamental policies with respect to the fund and the other series of
the trust (the "funds"). Under the terms of the 1940 Act, these
fundamental policies may not be changed with respect to the fund without
the vote of a majority of the outstanding voting securities of the 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 fund are present or
represented by proxy, or (b) more than 50% of the outstanding shares.
Set forth below are the investment policies of the trust, some of which
apply to the other series of the trust.
The investment policies adopted by the trust prohibit the 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 transactions.
5. 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.
6. 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.
7. 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.
8. 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"). 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.
9. Investing in oil, gas or other mineral exploration or
development programs, except that the Premium Total Return,
Convertible, Diversified Strategic Income, Balanced and High
Income Funds may invest in the securities of companies that
invest in or sponsor those programs.
10. Investing in securities of other investment companies
registered or required to be registered under the 1940 Act,
except as they may be acquired as part of a merger,
consolidation, reorganization, acquisition of assets or an
offer of exchange.
11. With respect to all funds except Exchange Reserve Fund,
writing or selling puts, calls, straddles, spreads or
combinations thereof, except as permitted under the fund's
investment objective and policies.
12. With respect to all funds except 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.
13. 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.
14. Making investments for the purpose of exercising control or
management.
15. 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.
16. 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 the 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.
17. 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 that 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 fund does not intend to seek profits through short-term trading.
Nevertheless, the fund will not consider portfolio turnover rate a
limiting factor in making investment decisions.
Under certain market conditions, the fund because it engages 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 the 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 the fund's
securities that are included in the computation of turnover were
replaced once during a one-year period. The 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 the 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 the fund's Investment Adviser or Sub-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 period August 1, 1996 to December 31, 1996, the
fund's portfolio turnover rate was 30%. For the fiscal years ended July
31, 1996 and December 31, 1997 and 1998, the fund's portfolio turnover
rate was 58%, 43% and ____%, respectively.
Portfolio Transactions
Most of the purchases and sales of securities by the 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 the fund are made by its Investment Adviser or Sub-
Investment Adviser, who is also responsible for placing these
transactions subject to the overall review of the Board of Trustees.
Although investment decisions for the fund are made independently from
those of the other accounts managed by its Investment Adviser and Sub-
Investment Adviser, investments of the type that the fund may make also
may be made by those other accounts. When the fund and one or more
other accounts managed by its Investment Adviser or Sub-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 or Sub-
Investment Adviser to be equitable to each. In some cases this
procedure may adversely affect the price paid or received by the 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 the fund's
payment of brokerage commissions:
Total Brokerage Commissions Paid
Fiscal
Year
Premium
Total
Return Fund
1996
$3,935,585
1996*
1,179,425
1997
11,955,237
1998
Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Premium
Total
Return Fund
1996
$628,778
1996*
209,905
1997
936,326
1998
% of Total Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Premium
Total
Return Fund
1996
15.98%
1996*
17.80
1997
7.83
1998
(*) For the period from August 1, 1996 through December 31, 1996.
In selecting brokers or dealers to execute securities transactions on
behalf of the fund, the fund's Investment Adviser or Sub-Investment
Adviser seeks the best overall terms available. In assessing the best
overall terms available for any transaction, the Investment Adviser or
Sub-Investment Adviser will consider the factors 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, the
Advisory Agreement between the trust and the 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 fund and/or other
accounts or funds over which the Investment Adviser or its affiliates
exercise investment discretion. The fees under the Advisory Agreement
and the Sub-Advisory and/or Administration Agreement 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 fund 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 the fund may be executed
through Salomon Smith Barney and other affiliated broker-dealers if, in
the judgment of the fund's Investment Adviser and/or Sub-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 adopted by the SEC,
Salomon Smith Barney may directly execute such transactions for the fund
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 fund will
not purchase any security, including U.S. government 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 fund 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 fund commodity
commissions at rates comparable to those charged by Salomon Smith Barney
to its most favored clients for comparable trades in comparable
accounts.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
Purchase of Shares
General. The fund offers five Classes of shares. Class A, L and O
shares are sold to investors with an initial sales charge. Class B
shares are sold without an initial sales charge but are subject to a
deferred sales charge payable upon certain redemptions. Class L and O
shares are also subject to a deferred sales charge payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or
deferred sales charge and are available only to investors investing a
minimum of $15,000,000. See the Prospectus for a discussion of factors
to consider in selecting which Class of shares to purchase. Class O
shares are available for purchase only by former Class C shareholders of
the fund.
Purchases of shares of the fund must be made through a brokerage account
maintained with Salomon Smith Barney, an Introducing Broker or an
investment dealer in the selling group. In addition, certain investors,
including qualified retirement plans and certain other institutional
investors, may purchase shares directly from the fund through the
transfer agent. When purchasing shares of the fund, investors must
specify whether the purchase is for Class A, Class B, Class L, Class O
or Class Y shares. Salomon Smith Barney and other broker/dealers may
charge their customers an annual account maintenance fee in connection
with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at the transfer agent are not subject to
a maintenance fee.
Investors in Class A, Class B, Class L and Class O shares may open an
account by making an initial investment of at least $1,000 for each
account, or $250 for an IRA or a Self-Employed Retirement Plan, in the
fund. Investors in Class Y shares may open an account by making an
initial investment of $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 Internal
Revenue Code of 1986, as amended (the "Code"), the minimum initial and
subsequent investment requirement for Class A, Class B, Class L and
Class O 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, Class L and Class O
shares and the subsequent investment requirement for all Classes is $25.
For shareholders purchasing shares of the fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment
requirement for Class A, Class B, Class L and Class O shares and the
subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements in Class A shares for employees of
Citigroup and its subsidiaries, including Salomon Smith Barney,
Directors or Trustees of any of the Smith Barney Mutual Funds, and their
spouses and children. The fund reserves the right to waive or change
minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be held in
the shareholder's account by 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 Salomon Smith Barney prior to
the close of regular trading on the New York Stock Exchange ("NYSE"), on
any day the fund calculates its net asset value, are priced according to
the net asset value determined on that day (the ''trade date''). Orders
received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the fund calculates its net asset value,
are priced according to the net asset value determined on that day,
provided the order is received by the fund's agent prior to the agent's
close of business. For shares purchased through Salomon Smith Barney and
Introducing Brokers purchasing through Salomon Smith Barney, payment for
shares of the fund 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 regular bank account or other
financial institution indicated by the shareholder, to provide
systematic additions to the shareholder's fund account. A shareholder
who has insufficient funds to complete the transfer will be charged a
fee of up to $25 by 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 market
fund to make additions to the account. Additional information is
available from the fund or a Salomon Smith Barney Financial Consultant.
Initial Sales Charge Alternative - Class A Shares. The sales charges
applicable to purchases of Class A shares of the fund are as follows:
Amount of
Investment
Sales Charge
as % of
Offering
Price
Sales Charge as
% of Amount Invested
Less than $25,000
5.00%
5.26%
25,000 - 49,999
4.00
4.17
50,000 - 99,999
3.50
3.63
100,000 - 249,999
3.00
3.09
250,000 - 499,999
2.00
2.04
500,000 and over
- -0-
- -0-
* 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 deferred sales charge of 1.00% on redemptions made
within 12 months of purchase. The deferred sales charge 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 deferred sales
charge is waived in the same circumstances in which the deferred
sales charge applicable to Class B, Class L and Class O shares is
waived. See "Purchase, Exchange and Redemption of Shares" -
''Deferred Sales Charge Alternatives'' and ''Waivers of Deferred
Sales Charge.''
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." Any "person" 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 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.
The reduced sales charge minimums may also be met by aggregating the
purchase with the net asset value of all Class A shares offered with a
sales charge held in funds sponsored by Salomon Smith Barney listed
under "Exchange Privilege."
Initial Sales Charge Alternative - Class L and O Shares. For purchases
of Class L and O shares, there is a sales charge of 1% of the offering
price (1.01% of the net amount invested).
Initial Sales Charge Waivers for Class A Shares. 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 of 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 Board members of any funds sponsored by
Citigroup and its affiliates 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 fund of the Smith Barney
Mutual Funds that are offered with a sales charge) and who wish to
reinvest their redemption proceeds in the same 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) purchase by Section 403(b) or Section
401(a) or (k) accounts associated with Copeland Retirement Programs; (g)
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 Salomon Smith Barney 401(k) Program (Note:
subsequent investments will be subject to the applicable sales charge);
(h) purchases by separate accounts used to fund certain unregistered
variable annuity contracts; 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 the purchase would qualify for
the elimination of the sales charge.
Right of Accumulation. Class A shares of the fund may be purchased by
"any person"' (as defined above) at a reduced sales charge or at net
asset value determined by aggregating the dollar amount of the new
purchase and the total net asset value of all Class A shares of the fund
and of funds sponsored by Salomon Smith Barney, which are offered with a
sales charge, listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information
at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to
all shares purchased thereafter.
Letter of Intent. 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 the investor
refers to such Letter when placing orders. For purposes of a Letter of
Intent, the ''Amount of Investment'' as referred to in the preceding
sales charge table includes purchases of all Class A shares of the fund
and other funds of the Smith Barney Mutual Funds offered with a sales
charge over the 13 month period based on the total amount of intended
purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13 month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference
between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares
will be redeemed. Please contact a Salomon Smith Barney Financial
Consultant or the transfer agent to obtain a Letter of Intent
application.
A Letter of Intent may also be used as a way for investors to meet the
minimum investment requirement for Class Y shares. The investor 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 same 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 deferred sales charge of 1.00%. Please contact a Salomon Smith
Barney Financial Consultant or the transfer agent for further
information.
Deferred Sales Charge Alternatives. Deferred Sales Charge Shares are
sold at net asset value next determined without an initial sales charge
so that the full amount of an investor's purchase payment may be
immediately invested in the fund. A deferred sales charge, however, may
be imposed on certain redemptions of these shares. ''Deferred Sales
Charge 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 subject to a deferred sales charge.
Any applicable deferred sales charges 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. Deferred Sales Charge
Shares that are redeemed will not be subject to a deferred sales charge
to the extent 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, Class O shares and Class A shares that are Deferred Sales
Charge Shares, shares redeemed more than 12 months after their purchase.
Class L shares, Class O shares and Class A shares that are Deferred
Sales Charge Shares are subject to a 1.00% deferred sales charge if
redeemed within 12 months of purchase. In circumstances in which the
deferred sales charge 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 Salomon 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
Deferred Sales
Charge
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 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.
In determining the applicability of any deferred sales charge, it will
be assumed that a redemption is made first of shares representing
capital appreciation, next of shares representing the reinvestment of
dividends and capital gain distributions and finally of other shares
held by the shareholder for the longest period of time. The length of
time that Deferred Sales Charge Shares acquired through an exchange have
been held will be calculated from the date 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 deferred sales charge will reduce the gain
or increase the loss, as the case may be, on the redemption. The amount
of any deferred sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares
of the fund at $10 per share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares of the fund 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 deferred sales charge 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 Deferred Sales Charge. The deferred sales charge 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'') (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 twelve 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
591/2; (e) involuntary redemptions; and (f) redemptions of shares to
effect the combination of the fund with any other investment company by
merger, acquisition of assets or otherwise. In addition, a shareholder
who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit for any
deferred sales charge imposed on the prior redemption.
Deferred sales charge 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
ExecChoiceTM 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, Class L and Class O
shares as investment alternatives under the Smith Barney 401(k) and
ExecChoiceTM Programs. Class A, Class L and Class O shares acquired
through the Participating Plans are subject to the same service and/or
distribution fees as the Class A, Class L and Class O shares acquired by
other investors; however, they are not subject to any initial sales
charge or deferred sales charge. 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 deferred sales charge 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 and O Shares. Class L and O shares of the fund are offered
without any sales charge or deferred sales charge to any Participating
Plan that purchases less than $1,000,000 of Class L and/or O shares of
one or more funds of the Smith Barney Mutual Funds. Class O shares may
only be purchased by plans if the plan opened its account on or before
June 12, 1998.
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 ExecChoice(tm) Program, a
Participating Plan's total Class L and/or 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 and/or O 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 its
total Class L and/or 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 and/or O shares for Class A shares of the same 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)
Program, 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 and/or O shares for Class
A shares of the same 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) Program. 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 and/or O shares, but
instead may acquire Class A shares of the same fund. Any Class L and/or
O 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 the transfer agent. For further
information regarding these Programs, investors should contact a Salomon
Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares: Class B shares of
the fund are not available for purchase by Participating Plans opened on
or after June 21, 1996, but may continue to be purchased by any
Participating Plan in the Smith Barney 401(k) Program opened prior to
such date and originally investing in such Class. Class B shares
acquired are subject to a deferred sales charge of 3.00% of redemption
proceeds if the Participating Plan terminates within eight years of the
date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, the Participating Plan will
be offered the opportunity to exchange all of its Class B shares for
Class A shares of the fund. Such Participating Plan will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth
anniversary date. Once the exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class B shares, but instead
may acquire Class A shares of the same fund. If the Participating Plan
elects not to exchange all of its Class B shares at that time, each
Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See
''Purchase of Shares-Deferred Sales Charge Alternatives.''
No deferred sales charge is imposed on redemptions of Class B shares to
the extent the net asset value of the shares redeemed does not exceed
the current net asset value of the shares purchased through reinvestment
of dividends or capital gain distributions, plus the current net asset
value of Class B shares purchased more than eight years prior to the
redemption, plus increases in the net asset value of the shareholder's
Class B shares above the purchase payments made during the preceding
eight years. Whether or not the deferred sales charge applies to the
redemption by a Participating Plan depends on the number of years since
the Participating Plan first became enrolled in the Smith Barney 401(k)
Program, unlike the applicability of the deferred sales charge to
redemptions by other shareholders, which depends on the number of years
since those shareholders made the purchase payment from which the amount
is being redeemed.
The deferred sales charge will be waived on redemptions of Class B
shares in connection with lump-sum or other distributions made by a
Participating Plan as a result of: (a) the retirement of an employee's
in the Participating Plan; termination of employment, death, disability,
or attainment of age 59 1/2; (b) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the
Code; or (c) redemptions of shares in connection with a loan made by the
Participating Plan to an employee.
Determination of Public Offering Prices
The trust offers shares of the fund to the public on a continuous basis.
The public offering price for a Class A and Class Y shares of the fund
is equal to the net asset value per share at the time of purchase, plus
for Class A shares an initial sales charge based on the aggregate amount
of the investment. The public offering price for a Class B share (and
Class A share purchases, including applicable rights of accumulation,
equaling or exceeding $500,000), is equal to the net asset value per
share at the time of purchase and no sales charge is imposed at the time
of purchase. A deferred sales charge, however, is imposed on certain
redemptions of Class B 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 fund's financial statements
incorporated by reference in their entirety into this SAI.
Exchange Privilege
As your needs change, you may wish to reposition your investments. With
Smith Barney Mutual Funds, you have the ability to exchange shares of
most Smith Barney mutual funds for those of others within the family.
Except as otherwise noted below, shares of each Class of the fund may be
exchanged for shares of the same Class of certain 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.
Class B Exchanges. In the event a Class B shareholder wishes to
exchange all or a portion of his or her shares in any fund imposing a
higher deferred sales charge than that imposed by the fund, the
exchanged Class B shares will be subject to the higher applicable
deferred sales charge. 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 only be exchanged for Class L
shares of another fund. Upon an exchange, 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.
The exchange privilege enables shareholders to acquire shares of the
same Class in the fund with different investment objectives when they
believe 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 deferred sales
charge, 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.
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 Investment Adviser 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 the
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. An exchange
involves a taxable redemption of shares, subject to the tax treatment
described in "Taxes" below, followed by a purchase of shares of a
different fund. 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 deferred sales charge.
Redemption requests received after the close of regular trading on the
NYSE are priced at the net asset value next determined. The right of
redemption of shares of the fund may be suspended or the date of payment
postponed (a) for any periods during which 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.
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
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,
Introducing Broker or dealer in the selling group or by submitting a
written request for redemption to:
Smith Barney Premium Total Return Fund
Class A, B, 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 the
transfer agent together with the redemption request. Any signature
appearing on a share certificate, stock power or written redemption
request in excess of $2,000 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 $2,000 or less do not require a signature guarantee unless
more than one such redemption request is made in any 10-day period.
Redemption proceeds will be mailed to an investor's address of record.
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.
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 ($5,000 for retirement plan accounts)
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 deferred sales charge will not be
waived on amounts withdrawn by a shareholder exceeding 1.00% per month
of the value of the shareholder's shares subject to the deferred sales
charge at the time the withdrawal plan commences. (With respect to
withdrawal plans in effect prior to November 7, 1994, any applicable
deferred sales charge will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's shares subject
to the deferred sales charge.) To the extent 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 the fund.
Withdrawals involve share redemptions that may have tax consequences for
shareholders. Furthermore, as it generally would not be advantageous to
a shareholder to make additional investments in the 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
Investors Services Group, Inc. ("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. 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.
Telephone Redemption and Exchange Program. Shareholders who do not have
a brokerage account may be eligible to redeem and exchange shares by
telephone. To determine if a shareholder is entitled to participate in
this program, he or she should contact 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/her initial investment in the fund.)
Redemptions. Redemption requests of up to $10,000 of any class or
classes of shares of the fund 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 5:00 p.m. (New York City time) on any day the NYSE
is open. Redemptions of shares (i) by retirement plans or (ii) for
which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed to his/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 5:00 p.m. (New York City time) on any day
on which the NYSE is open.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the fund nor any of its agents will be liable for
following instructions communicated by telephone that are reasonably
believed to be genuine. The fund and its agents will employ procedures
designed to verify the identity of the caller and legitimacy of
instructions (for example, a shareholder's name and account number will
be required and phone calls may be recorded). The fund reserves the
right to suspend, modify or discontinue the telephone redemption and
exchange program or to impose a charge for this service at any time
following at least seven (7) days' prior notice to shareholders.
Redemptions in Kind. In conformity with applicable rules of the SEC,
redemptions may be paid in portfolio securities, in cash or any
combination of both, as the Board of Trustees may deem advisable;
however, payments shall be made wholly in cash unless the Board of
Trustees believes that economic conditions exist that would make such a
practice detrimental to the best interests of the fund and its remaining
shareholders. If the Board of Trustees of the trust determines that it
would be detrimental to the best interests of the remaining shareholders
of the 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. Shareholders may incur
brokerage commissions when they subsequently sell those securities. If
a redemption is paid in portfolio securities, such securities will be
valued in accordance with the procedures described under "Share Price"
in the Prospectus and a shareholder would incur brokerage expenses if
these securities were then converted to cash.
DISTRIBUTOR
CFBDS, Inc. ("CFBDS") serves as the trust's distributor on a best
efforts basis pursuant to a distribution agreement dated October 8, 1998
(the "Distribution Agreement") which was approved by the trust's Board
of Trustees on July 15, 1998. Prior to the merger of Travelers Group,
Inc. and Citicorp Inc. on October 8, 1998, Salomon Smith Barney served
as the trust's distributor. For the fiscal years ended December 31,
1996, 1997 and 1998, CFBDS or Salomon Smith Barney, as its predecessor,
received approximately $________, $________, and $_______, respectively,
in sales charges from the sale of the fund's Class A shares, and did not
reallow any portion thereof to dealers. For the fiscal years ended
December 31, 1996, 1997 and 1998, CFBDS or Salomon Smith Barney received
from shareholders approximately $___________, $________ and $________,
respectively, in deferred sales charges on the redemptions of Class B
and Class O shares.
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 the distributor
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 the
distributor to invest the funds in a Smith Barney money market fund, the
amount of the investment will be included as part of the average daily
net assets of both the fund and the 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 SSBC
resulting from these settlement procedures and will take such benefits
into consideration when reviewing the Advisory, and Administration
Agreements for continuance.
Distribution Arrangements
To compensate Salomon Smith Barney for the service it provides and for
the expense it bears under the Distribution Agreement, the fund has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the fund pays Salomon Smith
Barney a service fee, accrued daily and paid monthly, calculated at the
annual rate of 0.25% of the value of the fund's average daily net assets
attributable to the Class A, Class B Class L and Class O shares. In
addition, the fund pays Salomon Smith Barney a distribution fee with
respect to Class B and Class O shares primarily intended to compensate
Salomon Smith Barney for its initial expense of paying Financial
Consultants a commission upon sales of those shares. The Class B, Class
L and Class O shares distribution fee is calculated at the annual rate
of 0.50% for Class B shares, 0.75% for Class L shares and 0.45% for
Class O shares of the value of the fund's average net assets
attributable to the shares of the respective Class.
The following expenses were incurred during the periods indicated:
Class A
For the Period from
August 1, 1996
through December 31,
1996
For the Fiscal Year Ended
July 31, 1996 December 31, 1997
December 31, 1998
$435,000
$968,000
$1,746,000
$
Deferred Sales Charge (paid to CFBDS and Salomon Smith Barney)
Class B
For the Period from
August 1, 1996
through December 31,
1996
For the Fiscal Year Ended
July 31, 1996 December 31, 1997
December 31, 1998
$1,009,000
$2,905,000
$2,318,000
$
Service Fees and Distribution Fees
For the Period from
August 1, 1996
through December 31,
1996
For the Fiscal Year Ended
July 31, 1996 December 31, 1997
December 31, 1998
$7,545,851
$15,646,14
7
$23,133,097
$
For the fiscal year ended December 31, 1998, Salomon Smith Barney
incurred distribution expenses totaling $26,938,444 consisting of
$212,486 for advertising, $38,913 for printing and mailing prospectuses,
$6,830,453 for support services and overhead expenses, $19,105,781 to
Salomon Smith Barney Consultants and $750,811 for accruals for interest
on the excess of Salomon Smith Barney expenses incurred in the
distribution of the fund's shares over the sum of the distribution fees
and deferred sales charges received by Salomon Smith Barney.
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 the Distributor 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 the fund, by vote of a majority of the
outstanding voting securities of the Class (as defined in the 1940 Act).
Pursuant to the Plan, the Distributor 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 the
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 the fund when investing in foreign securities may not take
place contemporaneously with the determination of the prices of many of
its other 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, SSBC, 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), are valued by SSBC, 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.
PERFORMANCE DATA
From time to time, the fund's yield or total return may be quoted in
advertisements or in reports and other communications to shareholders.
The trust may include comparative performance information in advertising
or marketing the fund's shares. Such performance information may
include the following industry and financial publications: Barron's,
Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The
Wall Street Journal. To the extent any advertisement or sales
literature of the 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
The 30-day yield figure is calculated according to a formula prescribed
by the SEC. The formula can be expressed as follows:
YIELD =2[(a-bcd+1)6-1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and
reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations purchased by the 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,
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. 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" for the fund is 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:
One-Year
Period
Five-Year
Period
Commencement of
Operations
* Fund commenced selling Class A shares on November 6, 1993.
The average annual total returns (with fees waived and without deferred
sales charge) of the fund's Class B shares were as follows for the
periods indicated:
One-Year
Period
Five-Year
Period
Ten-Year
Period
Commencement
of Operations
* Fund commenced operations on September 16, 1985.
The average annual total returns (with fees waived) of the fund's Class
O shares were as follows for the periods indicated:
One-Year
Period
Five-Year
Period
Commencement
of Operations
* The Fund commenced selling Class O shares on June 1, 1993.
The average annual total returns (with fees waived) of the fund's Class
L shares were as follows for the periods indicated:
Commencement of Operations
* The Fund commenced selling Class L shares on June ___, 1998.
Aggregate Total Return
The aggregate total return for the fund represents the cumulative change
in the value of an investment in the Class for the specified period and
is computed by the following formula:
ERV - P
P
Where:
P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of the 1-, 5-
or 10-year period at the end of the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The aggregate total returns (with fees waived) of the Class B
shares of the fund were as follows for the periods indicated:
No Load*
One-Year
Period
Five-
Year
Period
Ten-Year
Period
Commencement
of Operations
Load**
One-Year
Period
Five-
Year
Period
Ten-Year
Period
Commencement
of Operations
The aggregate total returns (with fees waived) of the Class A, Class O
and Class L shares of the fund were as follows for the periods
indicated:
No Load*
Class
One-Year
Period
Five-
Year
Period
Commencement
of Operations
Class A (1)
Class O (2)
Class L (3)
N/A
N/A
Load**
Class
One-Year
Period
Five-
Year
Period
Commencement
of Operations
Class A (1)
Class O (2)
Class L (3)
N/A
N/A
* Figures do not include the effect of the maximum sales charge or
maximum applicable deferred sales charge.
** Figures include the effect of the maximum sales charge or maximum
applicable deferred sales charge.
(1) The Fund commenced selling Class A shares on November 6, 1992.
(2) The Fund commenced selling Class O shares (previously designated
as Class C shares) on June 1, 1993.
(3) The Fund commenced selling Class L shares on June __, 1998.
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.
The performance of a Class of shares will vary from time to time
depending upon market conditions, the composition of the 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 fund and its shareholders. In addition to the
considerations described below, there may be other federal, state, local
or foreign tax applications to consider. This summary does not address
all of the potential federal income tax consequences that may be
applicable to the fund or to all categories of investors, some of which
may be subject to special tax rules. The 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
the fund.
Tax Status of the Fund
The fund is treated as a separate taxable entity for federal income tax
purposes.
The fund has qualified and the trust intends that the fund continue to
qualify separately each year as a "regulated investment company" under
the Code by complying with certain requirements regarding the sources
and distribution of its income and the diversification of its assets.
If it so qualifies, the 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 in accordance with the Code's
timing and other requirements. One of the several requirements for
qualification is that the fund receive at least 90% of its gross income
for each taxable 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 the fund to have difficulty
meeting this test.
Taxation of Investments by the Fund
Gains or losses on sales of securities by the fund generally will be
long-term capital gains or losses if the fund has held the securities
for more than one year, except for certain foreign currency related
gains or losses, as described below. Gains or losses on sales of
securities held for not more than one year generally will be short-term
capital gains or losses, except for certain foreign currency related
gains or losses, as described below. If the fund acquires a debt
security at a substantial market discount, a portion of any gain upon
sale or redemption will be taxed as ordinary income, rather than capital
gain, to the extent it reflects accrued market discount.
Dividends or other income (including, in some cases, capital gains)
received by the fund from investments in foreign securities may be
subject to withholding and other taxes imposed by foreign countries.
Tax conventions between certain countries and the United States may
reduce or eliminate such taxes in some cases. The fund will not be
eligible to elect to treat any foreign taxes paid by it as paid by its
shareholders, who therefore will not be entitled to deductions or
credits for such taxes on their own tax returns.
If the fund acquires an equity interest (including a depositary receipt
for shares of stock) in certain foreign investment entities, referred to
as "passive foreign investment companies," the fund itself may be
subject to U.S. federal income tax and an additional charge in the
nature of interest on a portion of any "excess distribution" from such
company or gain from the disposition of its equity interest, even if the
distribution or gain is distributed by the fund to its shareholders in a
manner that satisfies the requirements referred to above. If the fund
were able and elected to treat a passive foreign investment company as a
"qualified electing fund," in lieu of the treatment described above, the
fund would be required each year to include in income, and distribute to
shareholders in accordance with the distribution requirements referred
to above, the fund's pro rata share of the ordinary earnings and net
capital gains of the company, whether or not actually received by the
fund. The fund generally should be able to make an alternative election
to mark these investments to market annually, resulting in the
recognition of ordinary income (rather than capital gain) or ordinary
loss, subject to certain limitations on the ability to use any such
loss.
Under the Code, gains or losses attributable to foreign currency
transactions, or to fluctuations in exchange rates between the time the
fund accrues income or receivables or expenses or other liabilities
denominated in a foreign currency and the time the fund actually
collects such income or pays such liabilities, are treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition
of debt securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition
and disposition dates, are also treated as ordinary income or loss.
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 or shortly after
December 31 in each year of any undistributed ordinary income or capital
gains and expects to pay any additional dividends and distributions
necessary to avoid the application of this tax.
Options Transactions. The tax consequences of options transactions
entered into by the 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 the fund writes a call or put option on an equity
security (including a narrow-based stock index) or convertible debt
security or an over-the-counter option on a debt security, it will
receive a premium that will 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 in some cases a 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 the 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 the fund is exercised, the amount of the premium
will reduce the tax basis of the security the fund then purchases.
If a put or call option the fund has purchased on an equity security
(including a narrow-based stock index) or convertible debt security or
an over-the-counter option on a 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 for the option. If the fund
exercises such a put option, it will realize a short-term or long-term
capital gain or loss (depending upon its tax holding period for the
underlying security) from the sale of the underlying security measured
by the sales proceeds, decreased by the premium paid, and the fund's tax
basis for the underlying security. 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.
In lieu of the foregoing treatment, the Code imposes a special "mark-to-
market" system for taxing "section 1256 contracts" including certain
listed options on nonconvertible debt securities (including U.S.
government securities) or other listed nonequity options and options on
certain stock indexes. 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 or making
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 section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and mark-to-market year-end gain
or loss from these investment positions (including premiums received on
listed, nonequity 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 are actually held by the fund.
Constructive sale rules may also require the recognition of gains (but
not losses) if the fund engages in short sales or certain other
transactions.
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 or securities ("straddles"). Straddles are defined
to include "offsetting positions" in actively traded personal property.
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. Under current law, it is
not clear under certain circumstances whether one investment made by the
fund, such as an option contract, would be treated as offsetting another
investment also held by the fund, and, therefore, whether the fund would
be treated as having entered into a straddle.
If two (or more) positions constitute a straddle, a realized loss from
one position (including a mark-to-market loss) must be deferred to the
extent of unrecognized gain in an offsetting position. Also, the
holding period rules described above may be modified to recharacterize
long-term gain as short-term gain, or to recharacterize short-term loss
as long-term loss, in connection with certain straddle transactions.
Furthermore, interest and other carrying charges allocable to personal
property that is part of a straddle must be capitalized. In addition,
"wash sale" rules apply to straddle transactions to prevent the
recognition of loss from the sale of a position at a loss where a new
offsetting position is or has been acquired within a prescribed period.
To the extent the straddle rules apply to positions established by the
fund, losses realized by the fund may be either deferred or
recharacterized as long-term losses, and long-term gains realized by the
fund may be converted into short-term gains.
If the 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 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 the fund makes
certain elections, the section 1256 contract components of such
straddles will not be subject to the "60/40%" and/or mark-to-market
rules. If any such election is made, the amount, 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. The effect
of the straddles rules and the other rules described above may be to
change the amount, timing and character of the fund's income, gains and
losses and, therefore, its distributions.
Taxation of the Fund's Shareholders
Dividends paid by the fund from investment income and distributions from
any excess of its net short-term capital gain over its net long-term
capital loss are taxable to shareholders as ordinary income for federal
income tax purposes, whether received in cash or reinvested in
additional shares. Distributions from any excess of the fund's net
long-term capital gain over its net short-term capital loss are 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 shareholder has held his or her shares of the fund. For federal
income tax purposes, dividends declared by the fund in October, November
or December as of a record date in such a month and which are actually
paid in January of the following year will be treated as if they were
paid on December 31. These dividends will be taxable to shareholders as
if received on December 31 rather than in the year in which shareholders
actually receive the dividends.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder will also receive,
if appropriate, various written notices after the close of the fund's
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
taxable year. Shareholders should consult their tax advisors regarding
specific questions as to the federal, state and local tax consequences
of investing in the fund.
Dividends of investment income (but not capital gains) from the fund
generally will qualify for the Federal dividends-received deduction for
domestic corporate shareholders to the extent such dividends do not
exceed the aggregate amount of qualified dividends received by the fund
from domestic corporations. If securities held by the 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) during a prescribed period, 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. Receipt of dividends that qualify for the dividends
received deduction may increase a corporate shareholder's liability, if
any, for the alternative minimum tax. Such a shareholder should also
consult its tax adviser regarding the possibility that its federal tax
basis in its fund shares may be reduced by the receipt of "extraordinary
dividends" from the fund and, to the extent such basis would be reduced
below zero, current recognition of income would be required. The
dividends-received deduction will be allowed only with respect to
properly-designated dividends on fund shares for which a corporate
shareholder satisfies the same holding period rules, and subject to the
same limitations on debt financing, applicable to the fund.
If a shareholder (a) incurs a sales charge in acquiring fund shares and
(b) disposes of those shares within 90 days after the original
acquisition, and (c) acquires shares in a mutual fund for which the
otherwise applicable sales charge is reduced by reason of a reinvestment
right (e.g., an 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 shares 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. Additionally, any loss realized on a disposition of
fund shares generally will be disallowed to the extent the shares
disposed of are replaced with other shares of the fund within a period
of 61 days, beginning 30 days before and ending 30 days after such
disposition, such as pursuant to reinvestment of dividends in fund
shares.
Investors considering buying shares of the fund on or just prior to a
record date for a taxable dividend or capital gain distribution should
be aware that even if the net asset value of the fund's shares is
reduced below the investor's cost as a result of such a distribution,
any such payment will be a taxable dividend or distribution payment even
though it may represent a return of invested capital.
Share Redemptions. As a general rule, a shareholder who is not a dealer
in securities and 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, provided in each
case the transaction is properly treated as a sale rather than a
dividend for tax purposes. However, if a shareholder receives a
distribution taxable as long-term capital gain with respect to shares of
the 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
will be treated as a long-term capital loss to the extent of the
distribution.
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 dividends and
distributions and (b) any proceeds of any redemption of fund 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 federal income tax
liability. Certain distributions to nonresident aliens and foreign
entities may also be subject to other withholding taxes.
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.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
fund. The Master Trust Agreement disclaims shareholder liability for
acts or obligations of the fund, however, and requires that notice of
such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the fund or a Trustee. The Master Trust
Agreement provides for indemnification from fund property for all losses
and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its
obligations, a possibility which management of the fund believes is
remote. Upon payment of any liability incurred by the fund, a
shareholder paying such liability will be entitled to reimbursement from
the general assets of the fund. The Trustees intend to conduct the
operation of the fund in such a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the fund.
PNC Bank is located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and serves as the custodian for the fund. Under the
custodian agreement with the fund, the custodian is authorized to
establish separate accounts for foreign securities owned by the 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 fund, the custodian receives monthly fees based upon the
month-end aggregate net asset value of the 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 fund 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 fund's transfer agent. Under the transfer agency
agreement, First Data maintains the shareholder account records for the
fund, handles certain communications between shareholders and the trust
and distributes dividends and distributions payable by the fund. For
these services First Data receives from the fund a monthly fee computed
on the basis of the number of shareholder accounts maintained during the
year for the fund and is reimbursed for certain out-of-pocket expenses.
Description of Shares
The Master Trust Agreement of the fund permits the Trustees of the fund
to issue an unlimited number of full and fractional shares of a single
class and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the fund. Each share in the fund represents an equal
proportional interest in the fund with each other share. Shareholders
of the fund are entitled upon its liquidation to share pro rata in its
net assets available for distribution. No shareholder of the fund has
any preemptive or conversion rights. Shares of the fund are fully paid
and non-assessable.
Pursuant to the Master Trust Agreement, the fund's Trustees may
authorize the creation of additional series of shares (the proceeds of
which would be invested in separate, independently managed portfolios)
and additional classes of shares within any series (which would be used
to distinguish among the rights of different categories of shareholders,
as might be required by future regulations or other unforeseen
circumstances).
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended December 31, 1998
will be filed on or about March 1, 1999 and will be incorporated in its
entirety by reference. [Accession No. ____________].
APPENDIX A
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.
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 IBCA, 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 Fund, in accordance with industry practice,
recognizes 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 - SMITH BARNEY PREMIUM TOTAL
RETURN FUND
Statement of Additional Information
April 30, 1999
Smith Barney
Income Funds - Premium Total Return
Fund
388 Greenwich Street
New York, New York 10013
SALOMON SMITH BARNEY
A Member of Citigroup Inc.
15
Part C-Other Information
Item 23. 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).
(a)(1) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to
the Master Trust Agreement dated July 30, 1993 are
incorporated by reference to Post-Effective Amendment No.
36.
(2) Amendment to Registrant's Master Trust Agreement dated June 12, 1998 is
incorporated by reference to Post-Effective Amendment No. 52.
(b) Registrant's By-Laws are incorporated by reference to the Registration
Statement.
(c) 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 incorporated by reference to Post-Effective
Amendment No. 52.
(d)(1) 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.
(2) 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.
(3) Form of Investment Management Agreement between Registrant
and Mutual Management Corp. with respect to Smith Barney
Total Return Bond Fund is incorporated by reference to Post-Effective Amendment
No. 52.
(4) 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.
(5) 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) Form of Transfer and Assumption of Advisory Agreement is filed herein.
(e)(1)Distribution Agreement between the Registrant and Smith
Barney Inc. is incorporated by reference to the Post-
Effective Amendment No. 40.
(2) Distribution Agreement between the Registrant and PFS
Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(3) Distribution Agreement between the Registrant and CFBDS, Inc. dated October
8, 1998 is incorporated by reference to Post-Effective Amendment No. 52.
(f) Not Applicable.(g)(1) 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.
(2) 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.
(h)(1) Administration Agreement between the Registrant and MMC is
incorporated by reference to Post-Effective Amendment No.
40.
(2) 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.
(i) Opinion of Counsel was filed with Registrant's 24f-2
Notice on February 25, 1997 as accession number
0000091155-97-000095.
(j) Consent of Independent Auditors is filed herein.
(k) Not applicable.
(l) Not applicable.
(m)(1)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.
(2) Form of Amended Service and and Distribution Plan pursuant to Rule 12b-1
between the Registrant and Salomon Smith Barney Inc. is incorporated by
reference to Post-Effective Amendment No. 52.
(n) Financial Data Schedule to be filed by amendment.
(o) Amended Plan pursuant to Rule 18f-3(d) is incorporated by reference to
Post-Effective Amendment No. 52.
Item 24. Persons Controlled by or Under Common Control with
Registrant
None.
Item 25. Indemnification
The response to this item is incorporated by reference to Registrant's
Post-Effective Amendment No. 2 to the Registration Statement.
Item 26. 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 26 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).
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 26 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 26 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 27. Principal Underwriters
(a)
CFBDS, Inc., ("CFBDS") 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
Funds 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 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.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for
Variable Annuities, The Travelers Fund BD for Variable Annuities, The
Travelers Fund BD II for Variable Annuities, The Travelers Fund BD
III for Variable Annuities, The Travelers Fund BD IV for Variable
Annuities, The Travelers Fund ABD for Variable Annuities, The
Travelers Fund ABD II for Variable Annuities, The Travelers Separate
Account PF for Variable Annuities, The Travelers Separate Account PF
II for Variable Annuities, The Travelers Separate Account QP for
Variable Annuities, The Travelers Separate Account TM for Variable
Annuities, The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable
Annuities, The Travelers Separate Account Six for Variable Annuities,
The Travelers Separate Account Seven for Variable Annuities, The
Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL II
for Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance Separate
Account Two, The Travelers Variable Life Insurance Separate Account
Three, The Travelers Variable Life Insurance Separate Account Four,
The Travelers Separate Account MGA, The Travelers Separate Account
MGA II, The Travelers Growth and Income Stock Account for Variable
Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The
Travelers Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable
Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds
Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III,
CitiFunds International Trust, CitiFunds Fixed Income Trust,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. 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, U.S. Fixed 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 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.
In addition, CFBDS is also the distributor for the Centurion Funds,
Inc.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS 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 28. Location of Accounts and Records (1) Salomon Smith Barney
Inc.388 Greenwich StreetNew 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
(8) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None
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 23rd day of February,
1999.
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, 2/23/99
Heath B. McLendon President and Chief
Executive Officer
/s/Lewis E. Daidone Senior Vice President, 2/23/99
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Lee Abraham* Trustee 2/23/99
Lee Abraham
/s/ Allan J. Bloostein* Trustee 2/23/99
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee 2/23/99
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
(d) (6) Form of Transfer and Assumption of Advisory Agreement
(j) Consent of KPMG Peat Marwick LLP
(n) Financial Date Schedule +
+ To be filed by further amendment
Form of
TRANSFER AND ASSUMPTION OF ADVISORY AGREEMENT
SMITH BARNEY INCOME FUNDS
ON BEHALF OF SMITH BARNEY PREMIUM TOTAL RETURN FUND
TRANSFER AND ASSUMPTION OF ADVISORY AGREEMENT, made as of the ___day
of ________, 1998, by and among Smith Barney Income Funds (the
"Trust"), a trust organized under the laws of the Commonwealth of
Massachusetts, on behalf of the Smith Barney Premium Total Return
Fund (the "Portfolio"), Smith Barney Strategy Advisers Inc.
("SBSA"), a Delaware corporation, and Mutual Management
Corporation., a Delaware corporation ("MMC").
WHEREAS, the Trust is registered with the Securities and
Exchange Commission as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Trust consists of one investment portfolio or
series; and
WHEREAS, the Trust, on behalf of the Portfolio, and SBSA
entered into an Advisory Agreement on June 16, 1994, under which SBSA
serves as the investment adviser (the "Investment Adviser") for the
Portfolio; and
WHEREAS, SBSA desires that its interest, rights,
responsibilities and obligations in and under the Advisory Agreement
be transferred to MMC and MMC desires to assume SBSA's interest,
rights, responsibilities and obligations in and under the Advisory
Agreement; and
WHEREAS, this Agreement does not result in a change of actual
control or management of the Investment Adviser to the Trust and,
therefore, is not an "assignment" as defined in Section 2(a)(4) of
the Act nor an "assignment" for the purposes of Section 15(a)(4) of
the Act.
NOW, THEREFORE, in consideration of the mutual covenants set
forth in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Assignment. Effective as of_______, 1998 (the "Effective
Date"), SBSA hereby transfers to MMC all of SBSA's interest, rights,
responsibilities and obligations in and under the Advisory Agreement
dated June 16, 1994, to which SBSA is a party with the Trust.
2. Assumption and Performance of Duties. As of the
Effective Date, MMC hereby accepts all of SBSA's interest and rights,
and assumes and agrees to perform all of SBSA's responsibilities and
obligations in and under the Advisory Agreement; MMC agrees to be
subject to all of the terms and conditions of said Advisory
Agreement; and MMC shall indemnify and hold harmless SBSA from any
claim or demand made thereunder arising or incurred after the
Effective Date.
3. Representation of MMC. MMC represents and warrants that:
(1) it is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and (2) is an indirect wholly owned
subsidiary of Salomon Smith Barney Holdings Inc.
4. Consent. The Trust hereby consents to this transfer by
SBSA to MMC of SBSA's interest, rights, responsibilities and
obligations in and under the Advisory Agreement and to acceptance and
assumption by MMC of the same. The Trust agrees, subject to the
terms and conditions of said Advisory Agreement, to look solely to
MMC for the performance of the Investment Adviser's responsibilities
and obligations under said Advisory Agreement from and after the
Effective Date, and to recognize as inuring solely to MMC the
interest and rights heretofore held by SBSA thereunder.
5. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers hereunto
duly attested.
Attest:
By:
Secretary Smith Barney Income Funds
on behalf Smith Barney Premium
Total Return Fund
Date:
Attest:
By:
Secretary Mutual Management
Corporation
Date:
Attest:
By:
Secretary Smith Barney Strategy
Advisers Inc
Date:
Attest:
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Income Funds:
We consent to the use of our report dated February 10, 1998, with
respect to the Smith Barney Premium Total Return Fund of Smith Barney
Income Funds, incorporated herein by reference and to the references
to our Firm under the headings "Financial Highlights" in the
Prospectus and "Counsel and Auditors" in the Statement of Additional
Information.
KPMG LLP
New York, New York
February 23, 1999
