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, amended as of July 15, 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.............................6
Purchase, Exchange and Redemption of
Shares.............................33
Distributor..........................45
Valuation of
Shares..............................47
Performance Data....................48
Taxes...............................52
Additional
Information....................57
Financial
Statements.......................58
Appendix A............................59
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, President
and Chief Executive 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 64 investment companies managed by affiliates
of Citigroup Inc. ("Citigroup"); and former Chairman
of the Board of Smith Barney Strategy Advisers Inc.
Jane F. Dasher, Trustee (Age 49). Investment Officer;
Korsant Partners, a family investment company, 283
Greenwich Avenue, Greenwich, Connecticut 06830; Prior
to 1997, Independent Financial Consultant from 1975 to
1987, held various positions with Philip Morris
Companies, Inc. including Director of Financial
Services, Treasurers Department.
Donald R. Foley, Trustee (Age 76). Retired; 3668
Freshwater Drive, Jupiter, Florida 33477; Formerly
Vice President of Edwin Bird Wilson, Incorporated (an
advertising agency).
Paul Hardin, Trustee (Age 67). Professor of Law at
University of North Carolina at Chapel Hill; 12083
Morehead, Chapel Hill, North Carolina 27514; Director
of The Summit Bancorporation; Formerly, Chancellor of
the University of North Carolina at Chapel Hill.
Roderick C. Rasmussen, Trustee (Age 72). Investment
Counselor; 9 Cadence Court, Morristown, New Jersey
07960; Formerly Vice President of Dresdner and Company
Inc. (investment counselors).
John P. Toolan, Trustee (Age 68). Retired; 13 Chadwell
Place, Morristown, New Jersey 07960; Trustee of John
Hancock Funds; Formerly, Director and Chairman of
Smith Barney Trust Company, Director of Smith Barney
Holdings Inc. and various subsidiaries, Senior
Executive Vice President, Director and Member of the
Executive Committee of Smith Barney.
Ross Margolies, Investment Officer (Age 40). Managing
Director of Salomon Brothers Asset Management Inc.
("SaBAM"); Senior Portfolio Manager for all SaBAM
U.S. equity, convertibles and arbitrage portfolios;
Portfolio Manager of 25 other investment companies
associated with Citigroup. His address is 7 World
Trade Center, New York, New York 10048.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 41). Managing Director of Salomon Smith Barney;
Senior Vice President and Treasurer of 59 investment
companies associated with Citigroup; and Director and
Senior Vice President of SSBC and TIA.
Paul A. Brook, Controller (Age 45). Director of
Salomon Smith Barney; Controller or Assistant
Treasurer of 43 investment companies associated with
Citigroup since 1998; from 1997-1998 Managing Director
of AMT Capital Services Inc.; prior to 1997, Partner
with Ernst & Young LLP.
Christina T. Sydor, Secretary (Age 49). Managing
Director of Salomon Smith Barney; Secretary of 59
investment companies associated with Citigroup; and
General Counsel and Secretary of SSBC and TIA.
As of April 15, 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 April 15, 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
64.8615
Concert Series, Inc.
Balanced Portfolio PNC Bank, N.A.
Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Smith Barney
18.0384
Concert Series, Inc.
Select Balanced Portfolio
PNC Bank Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Smith Barney 8.7399
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.
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 (64)
0
0
0
Donald R. Foley (12)**
+
0
0
57,100
Paul Hardin (14)+
0
0
71,400
Roderick C. Rasmussen
(12)+
0
0
57,100
John P. Toolan (12)**
+
0
0
54,700
(*) Number of directorships/trusteeships held with
other Smith Barney Mutual Funds.
** Pursuant to a deferred compensation plan, the
indicated trustees have elected to defer the
following amounts of their total compensation
from the Fund Complex: Donald R. Foley: $21,000
and John P. Toolan: $54,700.
+ Elected as of April 19, 1999, therefore no
compensation was paid by fund through December 31,
1998.
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.
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. SSBC (through its predecessor
entities) has been in the investment counseling
business since 1968 and renders investment advice to a
wide variety of individual, institutional and
investment company clients that had aggregate assets
under management as of March 31, 1999 in excess of
$114 billion.
At a meeting of the Board of Trustees of the trust
held on April 15, 1999, the Trustees approved an
interim sub-advisory contract and subject to
shareholder approval, a new Sub-Advisory Agreement
("Agreement"), with SaBAM, on behalf of the fund.
SaBAM is an affiliate of SSBC. The Trustees also
approved the termination of the current sub-advisory
agreement with Boston Partners Asset Management LP
("Boston Partners"). The interim sub-advisory contract
commenced on April 26 and will terminate on the later
of 120 days or upon shareholder approval of the
Agreement. If the 120 days expires without shareholder
approval of the Agreement, SSBC would manage the fund
without the assistance of a sub-adviser until the
Board determines that additional action is
appropriate. Both the interim sub-advisory contract
and the Agreement obligate the sub-adviser to provide
investment advisory services to the fund. The interim
sub-advisory contract is identical to the current sub-
advisory agreement with Boston Partners in all
material respects. There are no material changes in
its terms and conditions and no change in fees. The
Agreement, if approved by shareholders would provide
for fees to be paid by the adviser to the sub-adviser
at a rate to be agreed upon from time to time but in
no instance to exceed the fees currently being paid to
the adviser.
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 a fee in an
amount agreed to from time to time by the parties but
not to exceed the fee paid to SSBC under its current
advisory agreement. Payments of the sub-advisory fee
to SaBAM will commence in accordance with the current
sub-advisory agreement dated December 1, 1997, with
Boston Partners upon the expiration of 60 days from
April 16, 1999, the date of the notice of termination
of that agreement.
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
$23,785,495
*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
$8,649,271
*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.
Auditors
KPMG LLP, 345 Park Avenue, New York, New York 10154
has been selected as the fund's independent auditors
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 in equity and
fixed income securities of both U.S. and foreign
issuers. The fund may engage in various portfolio
strategies involving options, futures, options on
futures and swaps to seek to increase its return, to
hedge its portfolio against movements in the equity
markets and interest rates or as a substitute for
buying and selling securities. Until the shareholders
approve a new sub-advisory agreement with SaBAM, the
fund also may invest up to 35% 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. See "Additional Risk
Factors" for additional information about the risks
of these investment practices.
Equity Securities
Common Stocks. The fund may purchase common stocks.
Common stocks are shares of a corporation or other
entity that entitle the holder to a pro rata share of
the profits of the corporation, if any, without
preference over any other shareholder or class of
shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock
usually carries with it the right to vote and
frequently an exclusive right to do so.
Convertible Securities. The fund may invest in
convertible securities which are fixed-income
securities that may be converted at either a stated
price or stated rate into underlying shares of common
stock. Convertible securities have general
characteristics similar to both fixed-income and
equity securities. Although to a lesser extent than
with fixed-income securities, the market value of
convertible securities tends to decline as interest
rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the
conversion feature, the market value of convertible
securities tends to vary with fluctuations in the
market value of the underlying common stocks and,
therefore, also will react to variations in the
general market for equity securities.
Like fixed-income securities, convertible securities
are investments which provide for a stable stream of
income with generally higher yields than common
stocks. Of course, like all fixed-income securities,
there can be no assurance of current income because
the issuers of the convertible securities may default
on their obligations. Convertible securities, however,
generally offer lower interest or dividend yields than
non-convertible securities of similar quality because
of the potential for capital appreciation. A
convertible security, in addition to providing fixed
income, offers the potential for capital appreciation
through the conversion feature, which enables the
holder to benefit from increases in the market price
of the underlying common stock. However, there can be
no assurance of capital appreciation because
securities prices fluctuate.
Convertible securities generally are subordinated to
other similar but non-convertible securities of the
same issuer, although convertible bonds enjoy
seniority in right of payment to all equity
securities, and convertible preferred stock is senior
to common stock of the same issuer. Because of the
subordination feature, however, convertible securities
typically have lower ratings than similar non-
convertible securities.
Synthetic Convertible Securities. The fund may invest
in synthetic convertible securities. Synthetic
convertible securities differ from convertible
securities in certain respects, including that each
component of a synthetic convertible security has a
separate market value and responds differently to
market fluctuations. Investing in synthetic
convertible securities involves the risk normally
involved in holding the securities comprising the
synthetic convertible security.
Unlike a convertible security, which is a single
security, a synthetic convertible security is
comprised of distinct securities that together
resemble convertible securities in certain respects.
Synthetic convertible securities are typically created
by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that
will form elements of synthetic convertible securities
may be listed on a securities exchange or on the
National Association of Securities Dealers Automated
Quotation System "NASDAQ" or may be privately traded.
The components of a synthetic convertible security
generally are not offered as a unit and may be
purchased and sold by the fund at different times.
Synthetic convertible securities differ from
convertible securities in certain respects, including
that each component of a synthetic convertible
security has a separate market value and responds
differently to market fluctuations.
Warrants or Rights. Warrants or rights may be acquired
by the fund in connection with other securities or
separately and provide the fund with the right to
purchase at a later date other securities of the
issuer. The fund has undertaken that its investment in
warrants or rights, valued at the lower of cost or
market, will not exceed 5% of the value of its net
assets. Warrants or rights acquired by the fund in
units or attached to securities will be deemed to be
without value for purposes of this restriction.
Real Estate Investment Trusts ("REITs"). The fund may
invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing
real estate or real estate related loans or interests.
REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage
REITs. Equity REITs invest the majority of their
assets directly in real property and derive income
primarily from the collection or rents. Equity REITs
may also include operating or finance companies.
Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real
estate mortgages and derive income from the collection
of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with
several requirements of the Internal Revenue Code of
1986, as amended (the "Code"). A mortgage trust can
make construction, development or long-term mortgage
loans, which are sensitive to the credit quality of
the borrower. Mortgage trusts derive their income from
interest payments. Hybrid trusts combine the
characteristics of both equity and mortgage trusts,
generally by holding both ownership interests and
mortgage interests in real estate.
Fixed Income Securities
Corporate Debt Obligations. The fund may invest in
corporate debt obligations and zero coupon securities
issued by financial institutions and corporations.
Corporate debt obligation are subject to the risk of
an issuer's inability to meet principal and interest
payments on the obligations and may also be subject to
price volatility due to such facts as market interest
rates, market perception of the creditworthiness of
the issuer and general market liquidity. Zero coupon
securities are securities sold at a discount to par
value and on which interest payments are not made
during the life of the security.
Zero Coupon, Pay-In-Kind and Delayed Interest
Securities. The fund may invest in zero coupon, pay-
in-kind and delayed interest securities as well as
custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of
future interest payments, principal payments or both
on certain U.S. government securities. Zero coupon
securities pay no cash income to their holders until
they mature and are issued at substantial discounts
from their value at maturity. When held to maturity,
their entire return comes from the difference between
their purchase price and their maturity value. Zero-
coupon and delayed interest securities are issued at a
significant discount from their principal amount.
While zero-coupon bonds do not require the periodic
payment of interest, deferred interest bonds provide
for a period of delay before the regular payment of
interest begins. Payment-in-kind bonds allow the
issuer, at its option, to make current interest
payments on the bonds either in cash or in additional
bonds. Because interest on zero coupon, pay-in-kind
and delayed interest securities is not paid on a
current basis, the values of securities of this type
are subject to greater fluctuations than are the
values of securities that distribute income regularly
and may be more speculative than such securities.
Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as
zero coupon U.S. government securities but are not
considered to be U.S. government securities. Although
under the terms of a custodial receipt a fund is
typically authorized to assert its rights directly
against the issuer of the underlying obligation, the
fund may be required to assert through the custodian
bank such rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails
to pay principal and/or interest when due, the fund
may be subject to delays, expenses and risks that are
greater than those that would have been involved if
the fund had purchased a direct obligation of the
issuer. In addition, in the event that the trust or
custodial account in which the underlying security has
been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable
entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
Mortgage-Backed Securities. The fund may invest in
mortgage backed securities, which are securities
representing interests in "pools" of mortgage loans.
Monthly payments of interest and principal by the
individual borrowers on mortgages are "passed through"
to the holders of the securities (net of fees paid to
the issuer or guarantor of the securities) as the
mortgages in the underlying mortgage pools are paid
off. The average lives of mortgage pass-throughs are
variable when issued because their average lives
depend on prepayment rates. The average life of these
securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying
mortgages result in a loss of anticipated interest,
and all or part of a premium if any has been paid, and
the actual yield (or total return) to a fund may be
different than the quoted yield on the securities.
Mortgage prepayments generally increase with falling
interest rates and decrease with rising interest
rates. Additional payment may be made out of
unscheduled repayments of principal resulting from the
sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs that
may be incurred. Prepayments of principal on mortgage-
backed securities may tend to increase due to
refinancing of mortgages as interest rates decline.
Like other fixed income securities, when interest
rates rise the value of a mortgage pass-through
security generally will decline; however, when
interest rates are declining, the value of mortgage
pass-through securities with prepayment features may
not increase as much as that of other fixed-income
securities.
Payment of principal and interest on some mortgage
pass-through securities (but not the market value of
the securities themselves) may be guaranteed by the
full faith and credit of the U.S. government (in the
case of securities guaranteed by the Government
National Mortgage Association ("GNMA"); or guaranteed
by agencies or instrumentalities of the U.S.
government (such as the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage
Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. government to
purchase the agency's obligations). Mortgage pass-
through securities may also be issued by non-
governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage
pass-through securities may be supported by various
forms of insurance or guarantees.
Interests in pools of mortgage-related securities
differ from other forms of debt securities, which
normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities
provide a monthly payment which consists of both
interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments
made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor
of such securities. Additional payments are caused by
prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property,
net of fees or costs which may be incurred. Some
mortgage pass-through securities (such as securities
issued by the GNMA) are described as "modified pass-
through." These securities entitle the holder to
receive all interest and principal payments owed on
the mortgages in the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of
whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-
through securities is the GNMA. GNMA is a wholly owned
U.S. government corporation within the Department of
Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S.
government, the timely payment of principal and
interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These
guarantees, however, do not apply to the market value
or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the
maturity value of the underlying mortgages. This
premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees
are not backed by the full faith and credit of the
U.S. government) include the FNMA and the FHLMC. FNMA
is a government-sponsored corporation owned entirely
by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed
by any governmental agency) from a list of approved
seller/servicers which include state and federally-
chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by
FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned
by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in
conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC
guarantees timely payment of interest and ultimate
collection of principal regardless of the status of
the underlying mortgage loans. Commercial banks,
savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other
secondary market issuers also create pass-through
pools of mortgage loans. Such issuers may also be the
originators and/or servicers of the underlying
mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate
of interest than government and government-related
pools because there are no direct or indirect
government or agency guarantees of payments in the
former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard
insurance and letters of credit. The insurance and
guarantees are issued by governmental entities,
private insurers and the mortgage poolers. There can
be no assurance that the private insurers or
guarantors can meet their obligations under the
insurance policies or guarantee arrangements. The fund
may also buy mortgage-related securities without
insurance or guarantees.
Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage
pass-through certificates that are structured to
direct payments on underlying collateral to different
series of classes of the obligations.
Asset-Backed Securities. The fund may invest in asset-
backed securities. These securities, issued by trusts
and special purpose corporations, are backed by a pool
of assets, such as credit card and automobile loan
receivables, representing the obligations of a number
of different parties. Asset-backed securities arise
through the grouping by governmental, government-
related and private organizations of loans,
receivables and other assets originated by various
lenders. Interests in pools of these assets differ
from other forms of debt securities, which normally
provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified
call dates. Instead, asset-backed securities provide
periodic payments which generally consist of both
interest and principal payments.
Corporate asset-backed securities present certain
risks. For instance, in the case of credit card
receivables, these securities may not have the benefit
of any security interest in the related collateral.
Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of
which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk
that the purchaser would acquire an interest superior
to that of the holders of the related automobile
receivables. In addition, because of the large number
of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee
for the holders of the automobile receivables may not
have a proper security interest in all of the
obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to
support payments on these securities.
Corporate asset-backed securities are often backed by
a pool of assets representing the obligations of a
number of different parties. To lessen the effect of
failures by obligors to make payments on underlying
assets, the securities may contain elements of credit
support which fall into two categories: (i) liquidity
protection and (ii) protection against losses
resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity
administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a
timely fashion. Protection against losses resulting
from ultimate default ensures payment through
insurance policies or letters of credit obtained by
the issuer or sponsor from third parties. The fund
will not pay any additional or separate fees for
credit support. The degree of credit support provided
for each issue is generally based on historical
information respecting the level of credit risk
associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an
instrument in such a security.
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 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 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.
Futures Contracts and Options on Futures Contracts.
To seek to increase total return or hedge against
changes in interest rates or securities prices, the
fund may purchase and sell futures contracts, and
purchase and write call and put options on these
futures contracts. The fund may also enter into
closing purchase and sale transactions with respect to
any of these contracts and options. These futures
contracts may be based on various securities (such as
U.S. government securities), securities indices and
any other financial instruments and indices. All
futures contracts entered into by the fund are traded
on U.S. exchanges or boards of trade that are
licensed, regulated or approved by the Commodity
Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally
be described as an agreement between two parties to
buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver
the final cash settlement price, in the case of a
contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not
normally held to maturity but are instead liquidated
through offsetting transactions which may result in a
profit or a loss. While futures contracts on
securities will usually be liquidated in this manner,
the fund may instead make, or take, delivery of the
underlying securities whenever it appears economically
advantageous to do so. A clearing corporation
associated with the exchange on which futures
contracts are traded guarantees that, if still open,
the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt
to establish with more certainty than would otherwise
be possible the effective price or rate of return on
portfolio securities or securities that the fund
proposes to acquire. When interest rates are rising
or securities prices are falling, the fund can seek to
offset a decline in the value of its current portfolio
securities through the sale of futures contracts.
When interest rates are falling or securities prices
are rising, the fund, through the purchase of futures
contracts, can attempt to secure better rates or
prices than might later be available in the market
when it effects anticipated purchases.
The fund may, for example, take a "short" position in
the futures market by selling futures contracts in an
attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that
would adversely affect the value of the fund's
portfolio securities. These futures contracts may
include contracts for the future delivery of
securities held by the fund or securities with
characteristics similar to those of the fund's
portfolio securities.
If, in the opinion of the Sub-Investment Adviser,
there is a sufficient degree of correlation between
price trends for the fund's portfolio securities and
futures contracts based on other financial
instruments, securities indices or other indices, the
fund may also enter into such futures contracts as
part of its hedging strategy. Although under some
circumstances prices of securities in the fund's
portfolio may be more or less volatile than prices of
these futures contracts, the Sub-Investment Adviser
will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate
for any differential by having the fund enter into a
greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against
price changes affecting the fund's portfolio
securities.
When a short hedging position is successful, any
depreciation in the value of portfolio securities will
be substantially offset by appreciation in the value
of the futures position. On the other hand, any
unanticipated appreciation in the value of the fund's
portfolio securities would be substantially offset by
a decline in the value of the futures position.
On other occasions, the fund may take a "long"
position by purchasing futures contracts. This would
be done, for example, when the fund anticipates the
subsequent purchase of particular securities when it
has the necessary cash, but expects the prices then
available in the applicable market to be less
favorable than prices that are currently available.
The fund may also purchase futures contracts as a
substitute for transactions in securities, to alter
the investment characteristics of portfolio securities
or to gain or increase its exposure to a particular
securities market.
Options on Futures Contracts. The fund may purchase
and write options on futures for the same purposes as
its transactions in futures contracts. The purchase
of put and call options on futures contracts will give
the fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively,
the underlying futures contract at any time during the
option period. As the purchaser of an option on a
futures contract, the fund obtains the benefit of the
futures position if prices move in a favorable
direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the
premium and transaction costs.
The writing of a call option on a futures contract
generates a premium which may partially offset a
decline in the value of the fund's assets. By writing
a call option, the fund becomes obligated, in exchange
for the premium (upon exercise of the option) to sell
a futures contract if the option is exercised, which
may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures
contract generates a premium which may partially
offset an increase in the price of securities that the
fund intends to purchase. However, the fund becomes
obligated (upon exercise of the option) to purchase a
futures contract if the option is exercised, which may
have a value lower than the exercise price. The loss
incurred by the fund in writing options on futures is
potentially unlimited and may exceed the amount of the
premium received.
The holder or writer of an option on a futures
contract may terminate its position by selling or
purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions
can be effected. The fund's ability to establish and
close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The fund may engage in futures
and related options transactions either for bona fide
hedging purposes or to seek to increase total return
as permitted by the CFTC. To the extent that the fund
is using futures and related options for hedging
purposes, futures contracts will be sold to protect
against a decline in the price of securities that the
fund owns or futures contracts will be purchased to
protect the fund against an increase in the price of
securities it intends to purchase. The Sub-Investment
Adviser will determine that the price fluctuations in
the futures contracts and options on futures used for
hedging purposes are substantially related to price
fluctuations in securities held by the fund or
securities or instruments which it expects to
purchase. As evidence of its hedging intent, the fund
expects that, on 75% or more of the occasions on which
it takes a long futures or option position (involving
the purchase of futures contracts), the fund will have
purchased, or will be in the process of purchasing,
equivalent amounts of related securities in the cash
market at the time when the futures or option position
is closed out. However, in particular cases, when it
is economically advantageous for the fund to do so, a
long futures position may be terminated or an option
may expire without the corresponding purchase of
securities or other assets.
To the extent that the fund engages in nonhedging
transactions in futures contracts and options on
futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will
not exceed 5% of the net asset value of the fund's
portfolio, after taking into account unrealized
profits and losses on any such positions and excluding
the amount by which such options were in-the-money at
the time of purchase.
Transactions in futures contracts and options on
futures involve brokerage costs, require margin
deposits and, in the case of contracts and options
obligating the fund to purchase securities, require
the fund to establish a segregated account consisting
of cash or liquid securities in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on
futures may reduce certain risks, these transactions
themselves entail certain other risks. For example,
unanticipated changes in interest rates or securities
prices may result in a poorer overall performance for
the fund than if it had not entered into any futures
contracts or options transactions.
Perfect correlation between the fund's futures
positions and portfolio positions will be impossible
to achieve. In the event of an imperfect correlation
between a futures position and a portfolio position
which is intended to be protected, the desired
protection may not be obtained and the fund may be
exposed to risk of loss.
Some futures contracts or options on futures may
become illiquid under adverse market conditions. In
addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a
futures contract or related option, which may make the
instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily
limits on the amount that the price of a futures
contract or related option can vary from the previous
day's settlement price. Once the daily limit is
reached, no trades may be made that day at a price
beyond the limit. This may prevent the fund from
closing out positions and limiting its losses.
Among the several risks accompanying the utilization
of futures contracts and options on futures contracts
are the following: First, the successful use of
futures and options is dependent upon the ability of
the adviser to predict correctly movements in the
stock market or in the direction of interest rates.
These predictions involve skills and techniques that
may be different from those involved in the management
of investments in securities. If the prices of the
underlying commodities move in an unanticipated
manner, the fund may lose the expected benefit of
these futures or options transactions and may incur
losses. Second, positions in futures contracts and
options on futures contracts may be closed out only by
entering into offsetting transactions on the exchange
where the position was entered into (or through a
linked exchange), and as a result of daily price
fluctuation limits there can be no assurance the
offsetting transaction could be entered into at an
advantageous price at a particular time.
Consequently, the fund may realize a loss on a futures
contract or option that is not offset by an increase
in the value of its portfolio securities being hedged
or the fund may not be able to close a futures or
options position without incurring a loss in the event
of adverse price movements.
Swaps, Caps, Floors, Collars and Swaptions. As one
way of managing its exposure to different types of
investments, the fund may enter into interest rate
swaps, currency swaps, and other types of swap
agreements such as caps, collars, floors and
swaptions. In a typical interest rate swap, one party
agrees to make regular payments equal to a floating
interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the
same notional amount, for a specified period of time.
If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the
notional principal amount as well. Swaps may also
depend on other prices or rates, such as the value of
an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees
to make payments only under specified circumstances,
usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap
obtains the right to receive payments to the extent
that a specified interest rate exceeds an agreed-upon
level, while the seller of an interest rate floor is
obligated to make payments to the extent that a
specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of
buying a cap and selling a floor. A swaption is an
option to buy or sell a swap position.
Swap agreements will tend to shift the fund's
investment exposure from one type of investment to
another. For example, if the fund agreed to exchange
payments in dollar for payments in a foreign currency,
the swap agreement would tend to decrease the fund's
exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps
and floors have an effect similar to buying or writing
options. Depending on how they are used, swap
agreements may increase or decrease the overall
volatility of the fund's investments and its share
price and yield.
Swap agreements are sophisticated risk management
instruments that typically require a small cash
investment relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have
a considerable impact on the fund's performance. Swap
agreements are subject to credit risks related to the
counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness
deteriorates. The fund may also suffer losses if it
is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions.
The fund will maintain in a segregated account cash or
liquid securities equal to the net amount, if any, of
the excess of the fund's obligations over its
entitlements with respect to swap, cap, collar, floor
or swaption transactions.
Additional Investments
Foreign Securities and American Depositary Receipts.
Until such time as the shareholders of the fund
approve a new sub-advisory agreement with SaBAM, the
fund will voluntarily limit its investments in foreign
securities and American Depositary Receipts ("ADRs")
to 20% of its assets. 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 its assets in medium- or low- rated securities
and unrated securities of comparable quality.
Securities rated below investment grade are frequently
called junk bonds. 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.
Securities which are rated below investment grade such
as Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay
interest and repay principal. Securities which are
rated B generally lack characteristics of a desirable
investment and assurance of interest and principal
payments over any long period of time may be small.
Securities which are rated Caa or CCC or below are of
poor standing. Those issues may be in default or
present elements of danger with respect to principal
or interest. Securities rated C by Moody's and D by
S&P are in the lowest rating class and indicate that
payments are in default or that a bankruptcy petition
has been filed with respect to the issuer or that the
issuer is regarded as having extremely poor prospects.
See the Appendix on bond ratings by Moody's and S&P.
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.
Illiquid and Restricted Securities. The fund may
purchase securities that are restricted as to resale
("restricted securities") under the Securities Act of
1933, as amended (the "1933 Act"). Some restricted
securities can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933
Act. The Board of Trustees may determine, based upon a
continuing review of the trading markets for a
specific restricted security, that such restricted
securities are liquid and therefore not subject to the
fund's restriction on illiquid investments. The Board
of Trustees has adopted guidelines and delegated to
management the daily function of determining and
monitoring liquidity of restricted securities
available pursuant to Rule 144A. The Board, however,
retains sufficient oversight and is ultimately
responsible for the determinations. Since it is not
possible to predict with assurance exactly how the
market for Rule 144A restricted securities will
develop, the Board will carefully monitor the fund's
investments in these securities, focusing on such
important factors, among others, as valuation,
liquidity and availability of information. Investments
in restricted securities could have the effect of
increasing the level of illiquidity in a fund to the
extent that qualified institutional buyers become for
a time uninterested in purchasing these restricted
securities.
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.
Yield Curve Options. The fund may enter into options
on the "spread," or yield differential, between two
fixed income securities, in transactions referred to
as "yield curve" options. In contrast to other types
of options, a yield curve option is based on the
difference between the yields of designated
securities, rather than the prices of the individual
securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a
call) or narrows (in the case of a put), regardless of
whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes
as other options on securities. Specifically, the fund
may purchase or write such options for hedging
purposes. For example, the fund may purchase a call
option on the yield spread between two securities, if
it owns one of the securities and anticipates
purchasing the other security and wants to hedge
against an adverse change in the yield spread between
the two securities. The fund may also purchase or
write yield curve options for other than hedging
purposes (i.e., in an effort to increase its current
income) if, in the judgment of management, the fund
will be able to profit from movements in the spread
between the yields of the underlying securities. The
trading of yield curve options is subject to all of
the risks associated with the trading of other types
of options. In addition, however, such options present
risk of loss even if the yield of one of the
underlying securities remains constant, if the spread
moves in a direction or to an extent which was not
anticipated. Yield curve options written by the fund
will be "covered". A call (or put) option is covered
if the fund holds another call (or put) option on the
spread between the same two securities and maintains
in a segregated account with its custodian cash or
cash equivalents sufficient to cover the fund's net
liability under the two options. Therefore, the fund's
liability for such a covered option is generally
limited to the difference between the amount of the
fund's liability under the option written by the fund
less the value of the option held by the fund. Yield
curve options may also be covered in such other manner
as may be in accordance with the requirements of the
counterparty with which the option is traded and
applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been
only recently introduced, established trading markets
for these securities have not yet developed.
Additional Risk Factors
General. Investors should realize that risk of loss is
inherent in the ownership of any securities and that
the fund's net asset value will fluctuate, reflecting
the fluctuations in the market value of its portfolio
positions. The following sections describe some of the
important risk factors involved in connection with the
types of investments or investment practices
indicated. See "Investment Objectives and Management
Policies" for a description of the permissible
investments and investment practices of the fund.
Fixed Income Securities. Investments in fixed income
securities may subject the fund to risks, including
the following.
Interest Rate Risk. When interest rates decline, the
market value of fixed income securities tends to
increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to
decline. The volatility of a security's market value
will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income
securities are subject to the risk that the issuer of
the security could default on its obligations, causing
a fund to sustain losses on such investments. A
default could impact both interest and principal
payments.
Call Risk and Extension Risk. Fixed income securities
may be subject to both call risk and extension risk.
Call risk exists when the issuer may exercise its
right to pay principal on an obligation earlier than
scheduled, which would cause cash flows to be returned
earlier than expected. This typically results when
interest rates have declined and the fund will suffer
from having to reinvest in lower yielding securities.
Extension risk exists when the issuer may exercise its
right to pay principal on an obligation later than
scheduled, which would cause cash flows to be returned
later than expected. This typically results when
interest rates have increased, and a fund will suffer
from the inability to invest in higher yield
securities.
Real Estate Investment Trusts. The values of
securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of
management skill. They are also subject to heavy cash
flow dependency, defaults by borrowers or tenants,
self-liquidation, the possibility of failing to
qualify for the ability to avoid tax by satisfying
distribution requirements under the Internal Revenue
Code of 1986, as amended, and failing to maintain
exemption from the 1940 Act. Also, the fund will
indirectly bear its proportionate share of expenses
incurred by REITs in which the fund invests. REITs
are also sensitive to factors such as changes in real
estate values and property taxes, interest rates,
overbuilding and creditworthiness of the issuer.
Zero Coupon, Pay-In-Kind and Delayed Interest
Securities. The values of these securities may be
highly volatile as interest rates rise or fall. In
addition, the fund's investments in zero coupon, pay-
in-kind and delayed interest securities will result in
special tax consequences. Although zero coupon
securities do not make interest payments, for tax
purposes a portion of the difference between a zero
coupon security's maturity value and its purchase
price is taxable income of the fund each year. The
value of zero-coupon bonds is subject to greater
fluctuation in market value in response to changes in
market interest rates than bonds of comparable
maturity which pay interest currently. Both zero-
coupon and payment-in-kind bonds allow an issuer to
avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve
greater credit risks than bonds that pay interest
currently. Even though such bonds do not pay current
interest in cash, the fund is nonetheless required to
accrue interest income on such investments and to
distribute such amounts at least annually to
shareholders. Accordingly, for the fund to continue to
qualify for tax treatment as a regulated investment
company and to avoid income and possibly excise tax,
the fund may be required to distribute as a dividend
an amount that is greater than the total amount of
cash it actually receives. These distributions must be
made from the fund's cash assets or, if necessary,
from the proceeds of sales of portfolio securities.
The fund will not be able to purchase additional
income-producing securities with cash used to make
such distributions and its current income ultimately
may be reduced as a result.
Derivative Instruments. In accordance with its
investment policies, the fund may invest in certain
derivative instruments, which are securities or
contracts that provide for payments based on or
"derived" from the performance of an underlying asset,
index or other economic benchmark. Essentially, a
derivative instrument is a financial arrangement or a
contract between two parties (and not a true security
like a stock or a bond). Transactions in derivative
instruments can be, but are not necessarily, riskier
than investments in conventional stocks, bonds and
money market instruments. A derivative instrument is
more accurately viewed as a way of reallocating risk
among different parties or substituting one type of
risk for another. Every investment by a fund,
including an investment in conventional securities,
reflects an implicit prediction about future changes
in the value of that investment. Every fund
investment also involves a risk that the portfolio
manager's expectations will be wrong. Transactions in
derivative instruments often enable a fund to take
investment positions that more precisely reflect the
portfolio manager's expectations concerning the future
performance of the various investments available to
the fund. Derivative instruments can be a legitimate
and often cost-effective method of accomplishing the
same investment goals as could be achieved through
other investment in conventional securities.
Derivative contracts include options, futures
contracts, forward contracts, forward commitment and
when-issued securities transactions, forward foreign
currency exchange contracts and interest rate,
mortgage and currency swaps. The following are the
principal risks associated with derivative
instruments.
Market risk: The instrument will decline in value or
that an alternative investment would have appreciated
more, but this is no different from the risk of
investing in conventional securities.
Leverage and associated price volatility: Leverage
causes increased volatility in the price and magnifies
the impact of adverse market changes, but this risk
may be consistent with the investment objective of
even a conservative fund in order to achieve an
average portfolio volatility that is within the
expected range for that type of fund.
Credit risk: The issuer of the instrument may default
on its obligation to pay interest and principal.
Liquidity and valuation risk: Many derivative
instruments are traded in institutional markets rather
than on an exchange. Nevertheless, many derivative
instruments are actively traded and can be priced with
as much accuracy as conventional securities.
Derivative instruments that are custom designed to
meet the specialized investment needs of a relatively
narrow group of institutional investors such as the
funds are not readily marketable and are subject to a
fund's restrictions on illiquid investments.
Correlation risk: There may be imperfect correlation
between the price of the derivative and the underlying
asset. For example, there may be price disparities
between the trading markets for the derivative
contract and the underlying asset.
Each derivative instrument purchased for the fund's
portfolio is reviewed and analyzed by the fund's
portfolio manager to assess the risk and reward of
each such instrument in relation the fund's portfolio
investment strategy. The decision to invest in
derivative instruments or conventional securities is
made by measuring the respective instrument's ability
to provide value to the fund and its shareholders.
Special Investment Considerations and Risks With
Respect to Futures, Options and Currency Transactions
and Swaps and Swap-Related Products. The successful
use of the investment practices described above with
respect to futures contracts, options on futures
contracts, forward contracts, options on securities
and on foreign currencies, and swaps and swap-related
products draws upon skills and experience which are
different from those needed to select the other
instruments in which the fund invests. Should interest
or exchange rates or the prices of securities or
financial indices move in an unexpected manner, the
fund may not achieve the desired benefits of futures,
options, swaps and forwards or may realize losses and
thus be in a worse position than if such strategies
had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to
options on currencies, forward contracts and other
negotiated or over-the-counter instruments, and
adverse market movements could therefore continue to
an unlimited extent over a period of time. In
addition, the correlation between movements in the
price of the securities and currencies hedged or used
for cover will not be perfect and could produce
unanticipated losses.
With respect to interest rate swaps, each fund
recognizes that such arrangements are relatively
illiquid and will include the principal amount of the
obligations owed to it under a swap as an illiquid
security for purposes of the fund's investment
restrictions except to the extent a third party (such
as a large commercial bank) has guaranteed the fund's
ability to offset the swap at any time.
The fund's ability to dispose of its positions in the
foregoing instruments will depend on the availability
of liquid markets in the instruments. Markets in a
number of the instruments are relatively new and still
developing, and it is impossible to predict the amount
of trading interest that may exist in those
instruments in the future. Particular risks exist with
respect to the use of each of the foregoing
instruments and could result in such adverse
consequences to the fund as the possible loss of the
entire premium paid for an option bought by the fund,
and the inability of the fund, as the writer of a
covered call option, to benefit from the appreciation
of the underlying securities above the exercise price
of the option. As a result, no assurance can be given
that the fund will be able to use those instruments
effectively for the purposes set forth above.
In connection with its transactions in futures,
options, swaps and forwards, the fund may be required
to place assets in a segregated account with the
fund's custodian bank to ensure that the fund will be
able to meet its obligations under these instruments.
Assets held in a segregated account generally may not
be disposed of for so long as the fund maintains the
positions giving rise to the segregation requirement.
Segregation of a large percentage of the fund's assets
could impede implementation of the fund's investment
policies or the fund's ability to meet redemption
requests or other current obligations.
Particular Risks of Futures Contracts. The prices of
futures contracts are volatile and are influenced,
among other things, by actual and anticipated changes
in interest rates, which in turn are affected by
fiscal and monetary policies and national and
international political and economic events.
At best, the correlation between changes in prices of
futures contracts and of the securities or currencies
being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances
such as: variations in speculative market demand for
futures and for debt securities or currencies,
including technical influences in futures trading; and
differences between the financial instruments being
hedged and the instruments underlying the standard
futures contracts available for trading, with respect
to interest rate levels, maturities, and
creditworthiness of issuers. A decision of whether,
when, and how to hedge involves skill and judgment,
and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior or
interest rate trends.
Because of the low margin deposits required, futures
trading involves an extremely high degree of leverage.
As a result, a relatively small price movement in a
futures contract may result in immediate and
substantial loss, as well as gain, to the investor.
For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin
deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the
original margin deposit, if the futures contract were
closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount
invested in the futures contract. The fund, however,
would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in
the underlying financial instrument and sold it after
the decline.
Furthermore, in the case of a futures contract
purchase, in order to be certain that the fund has
sufficient assets to satisfy its obligations under a
futures contract, the fund sets aside and commits to
back the futures contract an amount of cash, U.S.
government securities and other liquid, high-grade
debt securities equal in value to the current value of
the underlying instrument less the margin deposit. In
the case of a futures contract sale, the fund will
either set aside amounts as in the case of a futures
contract purchase, own the security underlying the
contract, or hold a call option permitting the fund to
purchase the same futures contract at a price no
higher than the contract price. Assets used as cover
cannot be sold while the position in the corresponding
futures contract is open, unless they are replaced
with similar assets. As a result, the commitment of a
significant portion of the fund's assets to cover
could impede portfolio management or the fund's
ability to meet redemption requests or other current
obligations.
Most United States futures exchanges limit the amount
of fluctuation permitted in futures contract prices
during a single trading day. The daily limit
establishes the maximum amount that the price of a
futures contract may vary either up or down from the
previous day's settlement price at the end of a
trading session. Once the daily limit has been reached
in a particular type of futures contract, no trades
may be made on that day at a price beyond that limit.
The daily limit governs only price movement during a
particular trading day and therefore does not limit
potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for
several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders
to substantial losses.
Mortgage-Backed Securities. To the extent the fund
purchases mortgage-related securities at a premium,
mortgage foreclosures and prepayments of principal
(which may be made at any time without penalty) may
result in some loss of the fund's principal investment
to the extent of the premium paid. The yield generated
by the fund that invests in mortgage-related
securities may be affected by reinvestment of
prepayments at higher or lower rates than the original
investment. In addition, like other debt securities,
the values of mortgage-related securities, including
government and government related mortgage pools,
generally will fluctuate in response to market
interest rates.
Other Asset-Backed Securities. The estimated life of
an asset-backed security varies with the prepayment
experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence
the life of an asset-backed security, will be
primarily a function of current market interest rates,
although other economic and demographic factors may be
involved. For example, falling interest rates
generally result in an increase in the rate of
prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An
acceleration in prepayments in response to sharply
falling interest rates will shorten the security's
average maturity and limit the potential appreciation
in the security's value relative to a conventional
debt security. Consequently, asset-backed securities
are not as effective in locking in high long-term
yields. Conversely, in periods of sharply rising
rates, prepayments generally slow, increasing the
security's average life and its potential for price
depreciation.
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 43%, 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
1996
$3,935,585
1996*
1,179,425
1997
11,955,237
1998
3,815,634
Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
1996
$ 628,778
1996*
209,905
1997
936,326
1998
1,102,296
% of Total Brokerage Commissions Paid to Salomon Smith
Barney
Fiscal
Year
1996
15.98%
1996*
17.80
1997
7.83
1998
28.88
% of Total Transactions Involving Commissions paid to
Salomon Smith Barney
Fiscal
Year
1996
16.30%
1996*
13.26
1997
23.74
1998
22.81
(*) 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 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
59; (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 ExecChoiceTM 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 ExecChoiceTM 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 ExecChoiceTM 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 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 ExecChoiceTM 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 ExecChoiceTM 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") located at 20 Milk Street,
Boston, Massachusetts 02109-5408 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.
At a December 13, 1996 telephone Board meeting, the
fund's fiscal year end changed from July 31 to
December 31. For the fiscal year ended July 31, 1996,
Salomon Smith Barney received $968,000 in sales
charges from the sale of Class A shares and did not
reallow any portion thereof to dealers. From August
1, 1996 through December 31, 1996, Salomon Smith
Barney received $435,000 in sales charges from the
sale of Class A shares and did not reallow any portion
thereof to dealers. For the December 31, 1997 fiscal
year, Salomon Smith Barney received $1,746,000 in
sales charges from the sale of Class A shares, and did
not reallow any portion thereof to dealers. For the
period January 1, 1998 through October 7, 1998 the
aggregate dollar amount of sales charges on Class A
shares was $1,531,000 all of which was paid to Salomon
Smith Barney. For the period October 8, 1998 through
December 31, 1998, the aggregate dollar amount of
sales charges on Class A shares was $157,000, $141,000
of which was paid to Salomon Smith Barney.
For the period June 12, 1998 through October 7, 1998,
the aggregate dollar amount of sales charges on Class
L shares was $184,000, all of which was paid to
Salomon Smith Barney. For the period October 8, 1998
through December 31, 1998 the aggregate dollar amount
of sales charges on Class L shares was $50,000,
$45,000 of which was paid to Salomon Smith Barney.
For the fiscal year ended July 31, 1996, Salomon Smith
Barney received from shareholders $1,000 in deferred
sales charges on the redemption of Class A shares.
From August 1, 1996 through December 31, 1996, Salomon
Smith Barney received from shareholders $3,000 in
deferred sales charges on the redemption of Class A
shares. For the fiscal years ended December 31, 1997
and 1998, Salomon Smith Barney received from
shareholders $3,000 and $2,000, respectively, in
deferred sales charges on the redemption of Class A
shares.
For the fiscal year ended July 31, 1996, Salomon Smith
Barney received from shareholders $2,905,000 in
deferred sales charges on the redemption of Class B
shares. From August 1, 1996 through December 31,
1996, Salomon Smith Barney received from shareholders
$1,009,000 in deferred sales charges on the redemption
of Class B shares. For the fiscal years ended
December 31, 1997 and 1998, Salomon Smith Barney
received from shareholders $2,318,000 and $3,233,000,
respectively, in deferred sales charges on the
redemption of Class B shares.
For the fiscal year ended December 31, 1998, Salomon
Smith Barney received from shareholders $19,000 in
deferred sales charges on the redemption of Class L
shares.
For the fiscal year ended July 31, 1996, Salomon Smith
Barney received from shareholders $12,000 in deferred
sales charges on the redemption of Class O shares.
From August 1, 1996 through December 31, 1996, Salomon
Smith Barney received from shareholders $5,000 in
deferred sales charges on the redemption of Class O
shares. For the fiscal years ended December 31, 1997
and 1998, Salomon Smith Barney received from
shareholders $17,000 and $24,000, respectively, in
deferred sales charges on the redemption of Class O
shares. For the fiscal year ended December 31, 1998,
there were no initial sales charges for Class O.
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 service and distribution fees were
incurred during the periods indicated:
Fiscal Year Fiscal Year Fiscal
Period Fiscal Period
Ended 12/31/98 12/31/97
8/1/96-12/31/96 1/1/96-7/31/96
Class A $2,248,211 $1,813,203
$592,473 $1,284,390
Class B 24,304,146 20,846,887
6,846,405 14,202,022
Class L* 90,652 n/a
n/a n/a
Class O** 791,809 473,007
106,973 159,735
* The fund commenced selling Class L shares on June
15, 1998.
**Class O shares were called Class C shares until June
12, 1998.
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*
0.88%
14.05%
13.94%
The average annual total without sales charges of the
fund's Class A shares were as follows for the period
indicated:
One-Year
Period
Five-Year
Period
Commencement of
Operations*
6.20%
15.23%
14.89%
* 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*
0.84%
14.54%
14.37%
13.60%
* Fund commenced operations on September 16,
1985.
Had the maximum applicable deferred sales charge not
been deducted at the time of redemption, Class B's
average annual total return would have been 5.64%,
14.66%, 14.37% and 13.60% for the same periods.
The average annual total return (with fees waived) of
the fund's Class L shares were as follows for the
period indicated:
Commencemen
t of
Operations*
(1.55)%
The average annual total return without sales charges
of the fund's Class L shares were as follows for the
period indicated:
Commencemen
t of
Operations*
0.36%
*The fund commenced selling Class L shares on June 15,
1998.
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*
4.73%
14.70%
14.51%
The average annual total returns without sales charges
of the fund's Class O shares were as follows for the
periods indicated:
One-Year
Period
Five-Year
Period
Commencement
of Operations*
5.69%
14.70%
14.51%
* The Fund commenced selling Class O shares on June 1,
1993.
The average annual total returns of the fund's Class Y
shares were as follows for the periods indicated:
One-Year
Period
Commencement
of Operations*
6.56%
16.84%
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 is as follows for the
periods indicated:
No Load*
One-Year
Period
Five-
Year
Period
Ten-Year
Period
Commencement
of Operations
5.64%
98.14%
282.89%
444.93%
Load**
One-Year
Period
Five-
Year
Period
Ten-Year
Period
Commencement
of Operations
0.84%
97.14%
282.89%
444.93%
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)
6.2%
103.15%
134.96%
Class O (2)
5.69%
98.49%
113.12%
Class L (3)
N/A
N/A
1.59%
Class Y
6.56%
N/A
56.99%
Load**
Class
One-Year
Period
Five-
Year
Period
Commencement
of Operations
Class A (1)
0.88%
92.93%
123.18%
Class O (2)
4.73%
98.49%
113.12%
Class L (3)
N/A
N/A
(0.35)%
Class Y
6.56%
N/A
56.99%
* 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 15, 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 was filed on April 9, 1999 and is
incorporated in its entirety by reference, Accession
No.0000091155-99-000245.
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.
101
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