As filed with the Securities and Exchange Commission
on April 30, 1999
Registration No. 2-96408
811-4254
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 54
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 55 [X]
SMITH BARNEY INCOME FUNDS
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212)816-6474
(Registrant's telephone number, including Area Code)
Christina T. Sydor
Secretary
Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013, 22nd Floor
(Name and address of agent for service)
(Approximate Date of Proposed Public Offering): Continuous
It is proposed that this filing becomes effective (check appropriate
box):
[X] Immediately upon filing pursuant to paragraph 485(b)
[ ] on (date) pursuant to paragraph 485(b)
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Part A-Prospectus
<PAGE>
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.(R)
PROSPECTUS
PREMIUM TOTAL
RETURN FUND
Class A, B, L, O and Y Shares
----------------------------------------------------------------
April 30, 1999.
The Securities and Exchange Commission has not approved or disapproved
these securities or determined whether this prospectus is accurate or
complete. Any statement to the contrary is a crime.
<PAGE>
Premium Total Return Fund
Contents
<TABLE>
<S> <C>
Fund goal and main strategies............................................... 2
Risks, performance and expenses............................................. 3
More on the fund's investments.............................................. 7
Management.................................................................. 9
Choosing a class of shares to buy........................................... 10
Comparing the fund's classes................................................ 11
Sales charges............................................................... 13
More about deferred sales charges........................................... 15
Buying shares............................................................... 16
Exchanging shares........................................................... 17
Redeeming shares............................................................ 19
Other things to know about share transactions............................... 21
Smith Barney 401(k) and
ExecChoice(TM) programs..................................................... 23
Distributions, dividends and taxes.......................................... 24
Share price................................................................. 25
Financial highlights........................................................ 26
</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
Smith Barney Mutual Funds
1
<PAGE>
Fund goal and main strategies
Investment objective
The fund seeks total return (that is, a combination of long-term capital
appreciation and income).
Key investments
The fund invests in equity and fixed income securities of both U.S. and foreign
issuers. The fund seeks to generate appreciation at a higher than market
rate by allocating a portion of the fund's
assets to equity and equity related securities, including
common stocks, real estate investment trusts and convertible securities. To
generate income and obtain exposure to the equity market, the fund will
purchase investment grade and high yield fixed income securities along with
options on securities indices. This combination seeks to produce a pattern of
total return that correlates with the S&P 500 Index. The fund may also use
options,
futures and options on futures to hedge against adverse changes in the market
value of its securities.
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
fixed income securities to 35% of its assets. The fund will invest in fixed
income securities which may be rated
below investment grade or be unrated securities of equivalent quality.
Securities rated below investment grade are commonly referred to as junk
bonds. Fixed
income securities may be of any maturity.
Selection process
The manager employs fundamental research and due diligence to assess a
company's:
.Growth potential, stock price, potential appreciation and valuation
.Credit quality taking into account financial condition and profitability
.Future capital needs
.Potential for change in bond rating and industry outlook
.Competitive environment and management ability
Premium Total Return Fund
2
<PAGE>
Risks, performance and expenses
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
.The stock market declines generally, thereby reducing the value of the fund's
equity portfolio
.Companies in which the fund invests fail to meet earnings expectations, fall
out of favor with investors, or other events depress their stock prices
.Interest rates increase, causing the prices of fixed income securities to de-
cline, thereby reducing the value of the fund's fixed income portfolio
.The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded
.The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
Below investment grade securities, which are commonly known as "junk bonds," are
speculative and their issuers may have diminished capacity to pay principal and
interest. These securities have a higher risk of default, tend to be less liq-
uid, and may be more difficult to value. Changes in economic conditions or
other circumstances are likely to weaken the capacity of issuers of these secu-
rities to make principal and interest payments.
Who may want to invest
The fund may be an appropriate investment if you:
.Are seeking to invest in a portfolio that includes both equity and fixed
income securities
.Are willing to accept the risks of both the stock market and the bond markets
Smith Barney Mutual Funds
3
<PAGE>
Total return
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future.
Total Return for Class B Shares
[BAR GRAPH APPEARS HERE]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
21.49% 4.62% 17.63% 15.68% 11.68% 8.12% 12.36% 14.21% 24.55% 5.64%
Calendar years ended December 31
The bar chart shows the performance of the fund's Class B shares for each of
the past 10 full calendar years. Class A, L, O and Y shares would have differ-
ent performance because of their different expenses. The performance informa-
tion in the chart does not reflect sales charges, which would reduce your
return.
Quarterly returns:
Highest: 14.90% in 1st quarter 1991; Lowest: (12.83)% in 3rd quarter 1990
Comparative performance
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Standard & Poor's 500 Composite Stock Index (the "Index"), a broad-based unman-
aged index of common stocks. This table assumes imposition of the maximum sales
charge applicable to the class, redemption of shares at the end of the period,
and reinvestment of distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
A 0.88% 14.05% N/A 13.94% 11/6/92
B 0.84% 14.54% 14.37% 13.60% 9/16/85
L N/A N/A N/A (1.55)% 6/15/98
O 4.73% 14.70% N/A 14.51% 6/1/93
Y 6.56% N/A N/A 16.84% 2/7/96
Index 28.60% 24.05% 19.19% 18.86% *
</TABLE>
*Index comparison begins on September 30, 1985.
Premium Total Return Fund
4
<PAGE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from
your investment) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Maximum sales charge on (load) imposed
purchases
(as a % of offering price) 5.00% None 1.00% 1.00% None
Maximum deferred sales charge (load)
(as a % of the lower of net asset
value at purchase or redemption) None* 5.00% 1.00% 1.00% None
</TABLE>
Annual fund operating expenses
<TABLE>
<CAPTION>
(Expenses deducted from
fund assets) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Management fee 0.75% 0.75% 0.75% 0.75% 0.75%
Distribution and service
(12b-1) fees 0.25% 0.75% 1.00% 0.70% None
Other expenses .12% .11% .07% .14% .01%
Total annual fund operating expenses 1.12% 1.61% 1.82% 1.59% .76%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial charge) but if you redeem those shares within 12 months of
their purchase, you will pay a deferred sales charge of 1.00%.
Smith Barney Mutual Funds
5
<PAGE>
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $608 $838 $1,086 $1,795
Class B (redemption at end of period) $663 $808 $ 976 $1,780
Class B (no redemption) $164 $508 $ 876 $1,780
Class L (redemption at end of period) $383 $667 $1,075 $2,216
Class L (no redemption) $283 $667 $1,075 $2,216
Class O (redemption at end of period) $360 $597 $ 957 $1,970
Class O (no redemption) $260 $597 $ 957 $1,970
Class Y (with or without redemption) $ 78 $243 $ 422 $ 942
</TABLE>
Premium Total Return Fund
6
<PAGE>
More on the fund's investments
The fund's investments in equity securities may include common stocks traded on
an exchange or in the over-the-counter market, preferred stocks, warrants,
rights, convertible securities, trust
certificates, limited partnership interests, equity-linked debt securities,
depositary receipts, real estate invest-
ment trusts and other equity participations.
The fund's investments in fixed income securities may include bonds, notes (in-
cluding structured notes), mortgage-related and asset-backed securities, con-
vertible securities, preferred stocks and money market instruments. Fixed
income securities may have all types of interest rate, payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred, pay-
ment in kind and auction rate features.
The price of fixed income securities will go down if interest rates go up, or
the credit rating of the security is downgraded or the issuer defaults on its
obligation to pay principal or interest.
Foreign securities Since the fund may invest in securities of foreign issuers,
the fund carries additional risks. Prices of foreign securities may go down
because of foreign government actions, political instability or the more lim-
ited availability of accurate information about foreign companies. Currency
fluctuations could erase investment gains or add to investment losses.
Derivative contracts The fund may, but need not, use derivative contracts, such
as futures and options on securities, securities indices, options on futures,
and swaps for the following purposes:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities because of changes in stock market prices or interest
rates
.As a substitute for buying or selling securities
.To increase the fund's total return
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more securities
or indices. Even a small investment in derivative contracts can have a large
impact on a fund's stock price and interest rate exposure. Therefore, using
derivatives can disproportionately increase losses and reduce opportunities for
gains when stock prices or interest rates are changing. The fund may not fully
benefit from or may lose money on derivatives if changes in their value do not
correspond accurately to changes in the value of the fund's holdings. The other
parties to certain derivative contracts present the same types of default risk
as issuers of fixed income securities. Derivatives can also make a fund less
liquid and harder to value, especially in declining markets.
Smith Barney Mutual Funds
7
<PAGE>
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
Premium Total Return Fund
8
<PAGE>
Management
Manager The fund's investment manager is SSBC Fund Management Inc., an affili-
ate of Salomon Smith Barney Inc. The manager's address is 388 Greenwich Street,
New York, New York 10013. The manager selects the fund's investments and
oversees its operations. The manager and Salomon Smith Barney are subsidiaries
of Citigroup Inc. Citigroup businesses produce a broad range of financial serv-
ices--asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading--and use diverse chan-
nels to make them available to consumer and corporate customers around the
world. The fund's administrator is SSBC Fund Management Inc. The administrator
oversees all aspects of the fund's administration and operation.
Effective on April 26, 1999, the fund's board of trustees appointed Salomon
Brothers Asset Management ("SaBAM"), an affiliate of SSBC Fund Management
Inc. located at 7 World Trade Center, New York, New York 10048, as the
interim sub-adviser pending shareholder approval. SaBAM provides investment
management and advisory services to mutual funds and currently manages
over $27.6 billion.
Ross Margolies, a Managing Director of SaBAM and senior portfolio manager for
all SaBAM U.S. equity, convertibles and arbitrage portfolios serves as the
fund's portfolio manager and is responsible for the day-to-day management of
the fund. Mr Margolies has over 18 years of investment management experience.
Management fees During the fund's last fiscal year, the manager received an
advisory fee equal to 0.55% of the fund's average daily net assets. In
addition, the administrator received a fee for its administrative services
to the fund equal to 0.20% of the fund's average daily net assets.
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells fund shares to the public.
Distribution plans The fund has adopted Rule 12b-1 distribution plans for its
Class A, B, L and O shares. Under each plan, the fund pays distribution and
service fees. These fees are an ongoing expense and, over time, they increase
the cost of your investment and may cost you more than other types of sales
charges.
Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager and Salomon Smith Barney are addressing the
Year 2000 issue for their systems. The fund has been informed by other service
providers that they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund, which are limited to requesting and receiving reports
from its service providers, or the efforts of its service providers to correct
the problem will be successful.
Smith Barney Mutual Funds
9
<PAGE>
Choosing a class of shares to buy
You can choose among five classes of shares: Classes A, B, L, O and Y. Each
class has different sales charges and expenses, allowing you to choose the
class that best meets your needs. Which class is more beneficial to an investor
depends on the amount and intended length of the investment.
.If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
.For Class B shares, all of your purchase amount and, for Class L and Class O
shares, more of your purchase amount (compared to Class A shares) will be
immediately invested. This may help offset the higher expenses of Class B,
Class L and Class O shares, but only if the fund performs well.
.Class L and Class O shares have a shorter deferred sales charge period than
Class B shares. However, because Class B shares convert to Class A shares,
and Class L and Class O shares do not, Class B shares may be more attractive
to long-term investors.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
Initial Additional
Classes A, B, L, O Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
IRAs, Self Employed Retirement Plans,
Uniform Gift to Minor Accounts $250 $15 million $50
Qualified Retirement Plans* $25 $15 million $25
Simple IRAs $1 n/a $1
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans
</TABLE>
*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans
Premium Total Return Fund
10
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Key features .Initial .No ini- .Initial .Available .No initial
sales tial sales for pur- or deferred
charge sales charge chase sales
.You may charge is lower only by charge
qualify .Deferred than former .Must invest
for sales Class A Class C at least
reduction charge .Deferred share- $15 million
or waiver declines sales holders .Lower
of ini- over charge .Deferred annual
tial time for only sales expenses
sales .Converts 1 year charge than the
charge to Class .Does for only other
.Lower A after not 1 year classes
annual 8 years convert .Does not
expenses .Higher to convert
than annual Class A to
Class B, expenses .Higher Class A
L or O than annual .Higher
Class A expenses annual
than expenses
Class A than
Class A
- -----------------------------------------------------------------------------
Initial sales charge Up to 5%; None 1.00% 1.00% None
reduced
for large
purchases
and waived
for cer-
tain
investors.
No charge
for pur-
chases of
$500,000
or more
- -----------------------------------------------------------------------------
</TABLE>
Smith Barney Mutual Funds
11
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Deferred sales charge 1% on Up to 5% 1% if 1% if None
purchases charged you you
of when you redeem redeem
$500,000 redeem within 1 within 1
or more shares. year of year of
if you The purchase purchase
redeem charge
within 1 is
year of reduced
purchase over
time and
there is
no
deferred
sales
charge
after 6
years
- -------------------------------------------------------------------------
Annual distribution and 0.25% of 0.75% of 1.00% of 0.70% of None
service fees average average average average
daily net daily daily daily
assets net net net
assets assets assets
- -------------------------------------------------------------------------
Exchangeable into* Class A Class B Class L Class L Class Y
shares of shares shares shares shares
most of most of most of most of most
Smith Smith Smith Smith Smith
Barney Barney Barney Barney Barney
funds funds funds funds funds
- -------------------------------------------------------------------------
</TABLE>
* Ask your Salomon Smith Barney Financial Consultant or dealer representative
or visit the web site for the Smith Barney funds available for exchange.
Premium Total Return Fund
12
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 5.00 5.26
$25,000 but less than $50,000 4.00 4.17
$50,000 but less than $100,000 3.50 3.63
$100,000 but less than $250,000 3.00 3.09
$250,000 but less than $500,000 2.00 2.04
$500,000 or more 0.00 0.00
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege - lets you combine the current value of Class A shares
owned
.by you, or
.by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
Letter of intent - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge,
Smith Barney Mutual Funds
13
<PAGE>
if any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
.Employees of members of the NASD
.403(b) or 401(k) retirement plans, if certain conditions are met
.Clients of newly employed Salomon Smith Barney Financial Consultants, if cer-
tain conditions are met
.Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer
representative or consult the Statement of Additional Information ("SAI").
Class B Shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued:
On reinvestment of Upon exchange from
Shares issued: dividends and another Smith Barney
At initial purchase distributions fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
</TABLE>
Premium Total Return Fund
14
<PAGE>
Class L and O Shares
You buy Class L or O shares at the offering price, which is the net asset value
plus a sales charge of 1% (1.01% of the net amount invested). In addition, if
you redeem your Class L or O shares within one year of purchase, you will pay a
deferred sales charge of 1%. If you held Class C shares of any Smith Barney
fund on June 12, 1998, you will not pay an initial sales charge on Class L
shares of the fund you may buy before June 22, 2001.
You may buy Class O shares only if you owned Class C shares of the fund on June
12, 1998. You will not pay an initial sales charge on Class O shares you buy
before June 22, 2001.
Class Y shares
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.
Smith Barney Mutual Funds
15
<PAGE>
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
.On payments made through certain systematic withdrawal plans
.On certain distributions from a retirement plan
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
Consultant or If you do not provide the following information, your order
dealer will be rejected
representative .Class of shares being bought
.Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account
no later than the third business day after you place your
order. Salomon Smith Barney or your dealer representative may
charge an annual account maintenance fee.
- --------------------------------------------------------------------------------
Through the Qualified retirement plans and certain other investors who
fund's transfer are clients of the selling group are eligible to buy shares
agent directly from the fund.
.Write the transfer agent at the following address:
Smith Barney Income Funds
Premium Total Return Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
.Enclose a check to pay for the shares. For initial pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.
- --------------------------------------------------------------------------------
Premium Total Return Fund
16
<PAGE>
Through a You may authorize Salomon Smith Barney, your dealer represen-
systematic tative or the transfer agent to transfer funds automatically
investment from a regular bank account, cash held in a Salomon Smith
plan Barney brokerage account or Smith Barney Money market fund to
buy shares on a regular basis.
. Amounts transferred should be at least: $25 monthly or $50
quarterly
. If you do not have sufficient funds in your account on a
transfer date, Salomon Smith Barney, your dealer represen-
tative or the transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer
agent or consult the SAI.
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the
varying needs
of both large
and small
investors
.You may exchange shares only for shares of the same class of
another Smith Barney fund. Class O shares may be exchanged
for Class L shares of another Smith Barney mutual fund. Not
all Smith Barney funds offer all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Smith Barney Mutual Funds
17
<PAGE>
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
- --------------------------------------------------------------------------------
By telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete an authorization form to authorize telephone transfers.
If eligible, you may make telephone exchanges on any day the
New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
time). Requests received after the close of regular trading
on the Exchange are priced at the net asset value next deter-
mined.
You can make telephone exchanges only between accounts that
have identical registrations.
- --------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the opposite page.
Premium Total Return Fund
18
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However,
if you recently purchased your shares by check, your redemp-
tion proceeds will not be sent to you until your original
check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
By Mail For accounts held directly at the fund, send written requests
to the transfer agent at the following address:
Smith Barney Income Funds
Premium Total Return Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
. Your account number
. The class of shares and the dollar amount or number of
shares to be redeemed
. Signatures of each owner exactly as the account is regis-
tered
Smith Barney Mutual Funds
19
<PAGE>
By Telephone If you do not have a brokerage account, you may be eligible
to redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent. You
must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by tel-
ephone on any day the New York Stock Exchange is open. Call
the transfer agent at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m. (Eastern time). Requests received after the close
of regular trading on the Exchange are priced at the net
asset value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You may be charged a fee for wire
transfers. You must submit a new authorization form to change
the bank account designated to receive wire transfers and you
may be asked to provide certain other documents.
- --------------------------------------------------------------------------------
Automatic
cash You can arrange for the automatic redemption of a portion of
withdrawal your shares on a monthly or quarterly basis. To qualify you
plans must own shares of the fund with a value of at least $10,000
($5,000 for retirement plans) and each automatic redemption
must be at least $50. If your shares are subject to a
deferred sales charge, the sales charge will be waived if
your automatic payments do not exceed 1% per month of the
value of your shares subject to a deferred sales charge.
The following conditions apply:
.Your shares must not be represented by certificates
.All dividends and distributions must be reinvested
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.
Premium Total Return Fund
20
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:
.Name of the fund
.Account number
.Class of shares being bought, exchanged or redeemed M Dollar amount or number
of shares being bought, exchanged or redeemed
.Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal identification number for the account, sending you a written confirmation
or requiring other confirmation procedures from time to time.
Signature guarantees To be in good order, your redemption request must include
a signature guarantee if you:
.Are redeeming over $10,000 of shares
.Are sending signed share certificates or stock powers to the transfer agent
.Instruct the transfer agent to mail the check to an address different from the
one on your account
.Changed your account registration
.Want the check paid to someone other than the account owner(s)
.Are transferring the redemption proceeds to an account with a different regis-
tration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
The fund has the right to:
.Suspend the offering of shares
.Waive or change minimum and additional investment amounts
.Reject any purchase or exchange order
.Change, revoke or suspend the exchange privilege
.Suspend telephone transactions
Smith Barney Mutual Funds
21
<PAGE>
.Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other share-
holders. If so, the fund may limit additional purchases and/or exchanges by the
shareholder.
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.
Premium Total Return Fund
22
<PAGE>
Smith Barney 401(k) and ExecChoice(TM) programs
You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice(TM) program. The fund offers Class A, Class L and, in
limited circumstances, Class O shares to participating plans as investment
alternatives under the programs. You can meet minimum investment and exchange
amounts by combining the plan's investments in any of the Smith Barney mutual
funds.
There are no sales charges when you buy or sell shares and the class of shares
you may purchase depends on the amount of your initial investment. Once a class
of shares is chosen, all additional purchases must be of the same class.
.Class A shares may be purchased by plans investing at least $1 million.
.Class L shares may be purchased by plans investing less than $1 million.
.Class O shares may be purchased by plans investing less than $1 million if the
plan opened its account on or before June 12, 1998. Class L and O shares are
eligible for exchange to Class A shares not later than 8 years after the plan
joined the program. They are eligible for conversion sooner in the following
circumstances:
If the account was opened on or after June 21, 1996 and a total of $1 mil-
lion is invested in Smith Barney Funds, Class L and O shares (other than
money market funds), all Class L and O shares are eligible for exchange
after the plan is in the program 5 years.
If the account was opened before June 21, 1996 and a total of $500,000 is
invested in Smith Barney Funds, Class L and O shares (other than money
market funds) on December 31 in any year, all Class L and O shares are
eligible for exchange on or about March 31 of the following year.
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
Smith Barney Mutual Funds
23
<PAGE>
Distributions, dividends and taxes
Dividends The fund pays dividends and capital gains distributions, if any, each
quarter from its net investment income. The fund may pay additional distribu-
tions and dividends at other times if necessary for the fund to avoid a federal
tax. Capital gain distributions and dividends are reinvested in additional fund
shares of the same class you hold. The fund expects distributions to be primar-
ily from capital gains. You do not pay a sales charge on reinvested distribu-
tions or dividends. Alternatively, you can instruct your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer agent to have your
distributions and/or dividends paid in cash. You can change your choice at any
time to be effective as of the next distribution or dividend, except that any
change given to the transfer agent less than five days before the payment date
will not be effective until the next distribution or dividend is paid.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal Tax Status
<S> <C>
Redemption or exchange of shares Usually capital gain or
loss; long-term only if
shares owned more than
one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
Any taxable dividends and capital gains are taxable whether received in cash or
reinvested in fund shares. Long-term capital gain distributions are taxable to
you as long-term capital gain regardless of how long you have owned your
shares. You may want to avoid buying shares when the fund is about to declare a
capital gain distribution or a dividend, because it will be taxable to you even
though it may actually be a return of a portion of your investment.
After the end of each year, the fund will provide you with information about
the distributions and dividends you received and any redemptions of shares dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
Premium Total Return Fund
24
<PAGE>
Share price
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
The fund generally values its fund securities based on market prices or quota-
tions. The fund's currency conversions are done when the London stock exchange
closes, which is 12 noon Eastern time. When reliable market prices or quota-
tions are not readily available, or when the value of a security has been mate-
rially affected by events occurring after a foreign exchange closes, the fund
may price those securities at fair value. Fair value is determined in accor-
dance with procedures approved by the fund's board. A fund that uses fair value
to price securities may value those securities higher or lower than another
fund that uses market quotations to price the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders
to buy, exchange or redeem shares to the fund's agent before the agent's close
of business.
Smith Barney Mutual Funds
25
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each class for the past 5 years (or since inception if less than 5
years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements,
are included in the annual report (available upon request). The information
for the fiscal year ended July 31, 1994 has been audited by another
independent accountant.
For a Class A share of beneficial interest outstanding throughout each year
ended December 31 except where noted:
<TABLE>
<CAPTION>
1998(/1/) 1997(/1/) 1996(/1/)(/2/) 1996(/5/)
1995(/5/) 1994(/5/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
Net asset value,
beginning of year $22.19 $19.14 $17.40 $16.33 $15.69
$15.65
- ------------------------------------------------------------------------------
Income from operations:
Net investment income 0.33 0.39 0.16 0.37 0.44
0.33
Net realized and
unrealized gain 1.00 4.29 2.21 1.98 1.48
0.99
- ------------------------------------------------------------------------------
Total income from
operations 1.33 4.68 2.37 2.35 1.92
1.32
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) <0.38) (0.16) (0.37) (0.43)
(0.55)
Net realized gains (1.89) (1.25) (0.47) (0.91) (0.14)
(0.52)
Capital -- -- -- -- (0.71)
(0.21)
- -------------------------------------------------------------------------------
Total distributions (2.14) (1.63) (0.63) (1.28) <1.28)
(1.28)
- -------------------------------------------------------------------------------
Net asset value, end of
year $21.38 $22.19 $19.14 $17.40 $16.33
$15.69
- -------------------------------------------------------------------------------
Total return 6.20% 25.19% 13.80%(/3/) 14.76% 12.92%
8.65%
- -------------------------------------------------------------------------------
Net assets, end of year
(000)'s $896,342 $833,540 $608,203 $534,329 $471,578
$67,699
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.12% 1.11% 1.12%(/4/) 1.12% 1.16%
1.19%
Net investment income 1.48 1.89 2.05(/4/) 2.16 2.81
2.05
- -------------------------------------------------------------------------------
Portfolio turnover rate 43% 43% 30% 58% 63%
34%
- -------------------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method
(/2/)For the period from August 1, 1996 to December 31, 1996, which
reflects a change in the fiscal year end of the fund.
(/3/)Not annualized.
(/4/)Annualized.
(/5/)For the fiscal year ended July 31.
Premium Total Return Fund
26
<PAGE>
For a Class B share of beneficial interest outstanding throughout each year
ended December 31 except where noted:
<TABLE>
<CAPTION>
1998(/1/) 1997(/1/) 1996(/1/)(/2/) 1996(/5/)
1995(/5/) 1994(/5/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
Net asset value,
beginning
of year $22.17 $19.14 $17.40 $16.33 $15.69
$15.65
- ------------------------------------------------------------------------------
Income from operations:
Net investment income 0.22 0.29 0.12 0.28 0.36
0.25
Net realized and
unrealized gain 0.99 4.28 2.21 1.99 1.48
1.00
- -------------------------------------------------------------------------------
Total income from
operations 1.21 4.57 2.33 2.27 1.84
1.25
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.23) (0.29) (0.12) <0.29) (0.34)
(0.49)
Net realized gains (1.89) (1.25) (0.47) (0.91) (0.14)
(0.52)
Capital -- -- -- - (0.72)
(0.20)
- -------------------------------------------------------------------------------
Total distributions (2.12) (1.54) (0.59) (1.20) (1.20)
(1.21)
- -------------------------------------------------------------------------------
Net asset value, end of
year $21.26 $22.17 $19.14 $17.40 $16.33
$15.69
- --------------------------------------------------------------------------------
Total return 5.64% 24.55% 13.57%(/3/) 14.21% 12.36%
8.12%
- -------------------------------------------------------------------------------
Net assets, end of year
millions $3,110 $3,170 2,355 $2,021 $1,655
$1,697
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.61% 1.60% 1.54%(/4/) 1.62% 1.66%
1.66%
Net investment income 0.99 1.39 1.63(/4/) 1.66 2.31
1.58
- -------------------------------------------------------------------------------
Portfolio turnover rate 43% 43% 30% 58% 63%
34%
- -------------------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method.
(/2/)For the period from August 1, 1996 to December 31, 1996, which
reflects a change in the fiscal year end of the fund.
(/3/)Not annualized.
(/4/)Annualized.
(/5/)For the fiscal year ended July 31.
Smith Barney Mutual Funds
27
<PAGE>
For a Class L share of beneficial interest outstanding throughout the year
ended December 31:
<TABLE>
<CAPTION>
1998(/1/)(/2/)
- ---------------------------------------------------
<S> <C>
Net asset value, beginning of year $ 23.06
- ---------------------------------------------------
Income from operations:
Net investment income 0.06
Net realized and unrealized loss (0.01)
- ---------------------------------------------------
Total income from operations 0.05
- ---------------------------------------------------
Less distributions from:
Net realized gains (1.82)
- ---------------------------------------------------
Total distributions (1.82)
- ---------------------------------------------------
Net asset value, end of year $ 21.29
- ---------------------------------------------------
Total return(/3/) 0.36%
- ---------------------------------------------------
Net assets, end of year (000)'s $25,471
- ---------------------------------------------------
Ratios to average net assets(/4/):
Expenses 1.82%
Net investment income 0.55
- ---------------------------------------------------
Portfolio turnover rate 43%
- ---------------------------------------------------
</TABLE>
(/1/)For the period from June 15, 1998 (inception date) to December 31, 1998.
(/2/)Per share amounts calculated using the monthly average shares method.
(/3/)Not Annualized.
(/4/)Annualized.
Premium Total Return Fund
28
<PAGE>
For a Class O(/1/) share of beneficial interest outstanding throughout each
year ended December 31 except where noted:
<TABLE>
<CAPTION>
1998(/2/) 1997(/2/) 1996(/2/)(/3/) 1996(/7/)
1995(/4/)(/7/) 1994(/7/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
Net asset value,
beginning of year $22.18 $19.15 $17.41 $16.33 $15.69
$15.65
- -------------------------------------------------------------------------------
Income from operations:
Net investment income 0.23 0.30 0.12 0.29 0.36
0.23
Net realized and
unrealized gain 0.99 4.28 2.21 1.99 1.48
1.02
- -------------------------------------------------------------------------------
Total income from
operations 1.22 4.58 2.33 2.28 1.84
1.25
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.23) (0.30) (0.12) (0.29) (0.35)
(0.49)
Net realized gains (1.89) (1.25) (0.47) <0.91) (0.14)
(0.52)
Capital -- -- -- -- (0.71)
(0.20)
- ------------------------------------------------------------------------------
Total distributions (2.12) (1.55) (0.59) <1.20) (1.20)
(1.21)
- -------------------------------------------------------------------------------
Net asset value, end of
year $21.28 $22.18 $19.15 $17.41 $16.33
$15.69
- --------------------------------------------------------------------------------
Total return 5.69% 24.60% 13.58%(/5/) 14.30% 12.36%
8.12%
- -------------------------------------------------------------------------------
Net assets, end of year
(000)'s $108,576 $93,676 $42,637 $31,044 $12,937
$1,878
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.59% 1.56% 1.55%(/6/) 1.59% 1.62%
1.60%
Net investment income 1.02 1.41 1.61(/6/) 1.68 2.35
1.65
- -------------------------------------------------------------------------------
Portfolio turnover rate 43% 43% 30% 58% 63%
34%
- --------------------------------------------------------------------------------
</TABLE>
(/1/)On June 12, 1998, Class C shares were renamed Class O shares.
(/2/)Per share amounts calculated using the monthly average shares method.
(/3/)For the period from August 1, 1996 to December 31, 1996, which
reflects a change in the fiscal year end of the fund.
(/4/)On November 7, 1994 the former Class D shares were renamed Class C shares.
(/5/)Not annualized.
(/6/)Annualized.
(/7/)For the fiscal year ended July 31.
Smith Barney Mutual Funds
29
<PAGE>
For a Class Y share of beneficial interest outstanding throughout each year
ended December 31 except where noted:
<TABLE>
<CAPTION>
1998(/1/) 1997(/1/) 1996(/1/)(/2/) 1996(/3/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year $22.24 $19.17 $17.42 $17.57
- -------------------------------------------------------------------------------
Income from operations:
Net investment income 0.40 0.47 0.17 0.19
Net realized and
unrealized gain 1.01 4.29 2.23 0.33
- -------------------------------------------------------------------------------
Total income from
operations 1.41 4.76 2.40 0.52
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.44) (0.18) (0.21)
Net realized gains (1.89) (1.25) (0.47) (0.46)
- -------------------------------------------------------------------------------
Total distributions (2.16) (1.69) (0.65) (0.67)
- -------------------------------------------------------------------------------
Net asset value, end of
year $21.49 $22.24 $19.17 $17.42
- -------------------------------------------------------------------------------
Total return 6.56% 25.61% 13.95%(/4/) 2.93%(/4/)
- -------------------------------------------------------------------------------
Net assets, end of year
(000)'s $77,210 $50,882 $26,585 $13,192
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.76% 0.76% 0.80%(/5/) 0.87%(/5/)
Net investment income 1.82 2.22 2.36(/5/) 2.24(/5/)
- -------------------------------------------------------------------------------
Portfolio turnover rate 43% 43% 30% 58%
- -------------------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method.
(/2/)For the period from August 1, 1996 to December 31, 1996, which
reflects a change in the fiscal year end of the fund.
(/3/)For the period from February 7, 1996 (inception date) to July 31, 1996.
(/4/)Not annualized.
(/5/)Annualized.
Premium Total Return Fund
30
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Premium Total Return Fund
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the Commis-
sion, Washington, D.C. 20549-6009. Information about the public reference room
may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254) (FD0213 4/99]
Part B-Statement of Additional Information
Smith Barney
INCOME FUNDS - SMITH BARNEY PREMIUM TOTAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information
April 30, 1999
This Statement of Additional Information ("SAI") is meant to
be read in conjunction with the prospectus of the Smith
Barney Premium Total Return Fund (the "fund") dated April
30, 1999, as amended or supplemented from time to time (the
"Prospectus"), and is incorporated by reference in its
entirety into the prospectus. Additional information about
the fund's investments is available in the fund's annual and
semi-annual reports to shareholders which are incorporated
herein by reference. The prospectus and copies of the
reports may be obtained free of charge by contacting a
Salomon Smith Barney Financial Consultant, or by writing or
calling Salomon Smith Barney at the address or telephone
number above. The fund is a separate investment series of
Smith Barney Income Funds (the "trust").
This SAI is not a prospectus. It is intended to provide
more detailed information about the fund as well as matters
already discussed in the Prospectus and therefore should be
read in conjunction with the Prospectus dated April 30,
1999, which may be obtained from the fund or your Salomon
Smith Barney Financial Consultant.
TABLE OF CONTENTS
Trustees and Executive Officers of the
Trust....................................................................2
Investment Objectives and Management
Policies..............................................................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 a certain number of other Citigroup investment
companies. 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 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. 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.
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.
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.
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. 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
without limitations 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.
U.S. Government Securities. The fund may invest in U.S.
government securities, which are debt obligations issued or
guaranteed as to payment of principal and interest by the
U.S. Government (including Treasury bills, notes and bonds,
certain mortgage participation certificates and
collateralized mortgage obligations) or by its agencies and
instrumentalities (such as GNMA, the Student Loan Marketing
Association, the Tennessee Valley Authority, the Bank for
Cooperatives, the Farmers Home Administration, Federal Farm
Credit Banks, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks, the Export-Import Bank of
the U.S., the Federal Housing Administration, FHLMC, the
U.S. Postal Service, the Federal Financing Bank and FNMA).
Some of these securities (such as Treasury bills) are
supported by the full faith and credit of the U.S. Treasury;
others (such as obligations of the Federal Home Loan Bank)
are supported by the right of the issuer to borrow from the
Treasury; while still others (such as obligations of FNMA
and the Student Loan Marketing Association) are supported
only by the credit of the instrumentality.
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 up to 10% of its assets to purchase put options on
portfolio securities and may do so at or about the same time
it purchases the underlying security or at a later time. By
buying a put, the fund limits the risk of loss from a
decline in market value of the security until the put
expires. Any appreciation in the value of, or in the yield
otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. The
fund may utilize up to 10% of its assets to purchase call
options on portfolio securities. Call options may be
purchased by the fund in order to acquire the underlying
securities for the fund at a price that avoids any
additional cost that would result from a substantial
increase in the market value of a security. The fund also
may purchase call options to increase its return to
investors at a time when the call is expected to increase in
value due to anticipated appreciation of the underlying
security.
Prior to their expirations, put and call options may be sold
in closing sale transactions (sales by the fund, prior to
the exercise of options it has purchased, of options of the
same series), and profit or loss from the sale will depend
on whether the amount received is more or less than the
premium paid for the option plus the related transaction
costs.
More About Options on Securities. Although the fund
generally will purchase or write only those options for
which its Investment Adviser or Sub-Investment Adviser
believes there is an active secondary market, there is no
assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist
for any particular option or at any particular time, and for
some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a
variety of reasons. At times in the past, for example,
higher than anticipated trading activity or order flow or
other unforeseen events have rendered inadequate certain of
the facilities of the Options Clearing Corporation (the
"Clearing Corporation") as well U.S. and foreign securities
exchanges and resulted in the institution of special
procedures such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in
one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In
such event, it might not be possible to effect closing
transactions in particular options. If the fund as a
covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option
expires or it delivers the underlying security upon
exercise.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class
that may be held, written or exercised within certain time
periods by an investor or group of investors acting in
concert (regardless of whether the options are written on
the same or different securities exchanges or are held,
written or exercised in one or more accounts or through one
or more brokers). It is possible the fund, other clients of
the Investment Adviser and certain of their affiliates may
be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation
of these limits and it may impose certain other sanctions.
In the case of options that are deemed covered by virtue of
the fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or
exchange and obtain physical delivery of the underlying
common stocks with respect to which the fund has written
options may exceed the time within which the fund must make
delivery in accordance with an exercise notice. In these
instances, the fund may purchase or borrow temporarily the
underlying securities for purposes of physical delivery. By
so doing, the fund will not bear any market risk because the
fund will have the absolute right to receive from the issuer
of the underlying security an equal number of shares to
replace the borrowed stock, but the fund may incur
additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Additional risks exist with respect to certain U.S.
government securities for which the fund may write covered
call options. If the fund writes covered call options on
mortgage-backed securities, the securities that it holds as
cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover. The fund will
compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of those
securities.
Stock Index Options. The fund may purchase and write
exchange-listed put and call options on stock indexes
primarily to hedge against the effects of market-wide price
movements. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common
stocks included in the index. Examples of well-known stock
indexes are the Standard & Poor's Daily Price Index of 500
Common Stocks and the NYSE Composite Index. Some stock
index options are based on a broad market index such as the
New York Stock Exchange Composite Index or a narrower market
index such as the Standard & Poor's 100. Indexes also are
based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on
securities. However,(a) because options on stock indexes do
not involve the delivery of an underlying security, the
option represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the
underlying index on the exercise date, (b) the expiration
cycles of stock index options are monthly, while those of
stock options are currently quarterly and (c) the delivery
requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will depend
upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call)
or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be equal to
such difference between the closing price of the index and
the exercise price of the option expressed in dollars times
a specified multiple. The writer of the option is
obligated, in return for the premium received, to make
delivery of this amount. The writer may offset its position
in stock index options prior to expiration by entering into
a closing transaction on an exchange or it may let the
option expire unexercised.
Because the value of an index option depends upon movements
in the level of the index rather than the price of a
particular stock, whether the fund will realize gain or loss
from the purchase or writing of options on an index depends
upon movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the
price of a particular stock. Accordingly, successful use by
the fund of options on stock indexes will be subject to the
ability of the Investment Adviser and/or Sub-Investment
Adviser to predict correctly movements in the direction of
the stock market generally or of a particular industry.
This requires different skills and techniques than
predicting changes in the prices of individual stocks.
The fund will engage in stock index options transactions
only when such a strategy is determined by the Investment
Adviser or Sub-Investment Adviser to be consistent with the
fund's efforts to control risk. There can be no assurance
that such judgment will be accurate or that the use of these
portfolio strategies will be successful. When the fund
writes an option on a stock index, it will establish a
segregated account in the name of the fund consisting of
cash, equity securities or debt securities of any grade in
an amount equal to or greater than the market value of the
option, provided such securities are liquid and unencumbered
and are marked to market daily pursuant to guidelines
established by the Trustees.
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
up to 35% of 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(tm) Programs.''
Year Since Purchase
Payment Was Made
Deferred Sales
Charge
First
5.00%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A shares
eight years after the date on which they were purchased and
thereafter will no longer be subject to any distribution
fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the
shareholder as the total number of his or her Class B shares
converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder.
In determining the applicability of any deferred sales
charge, it will be assumed that a redemption is made first
of shares representing capital appreciation, next of shares
representing the reinvestment of dividends and capital gain
distributions and finally of other shares held by the
shareholder for the longest period of time. The length of
time that Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the date the
shares exchanged were initially acquired in one of the other
Smith Barney Mutual Funds, and fund shares being redeemed
will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax
purposes, the amount of the deferred sales charge will
reduce the gain or increase the loss, as the case may be, on
the redemption. The amount of any deferred sales charge will
be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares of the fund at $10 per share for a cost of
$1,000. Subsequently, the investor acquired 5 additional
shares of the fund through dividend reinvestment. During
the fifteenth month after the purchase, the investor decided
to redeem $500 of his or her investment. Assuming at the
time of the redemption the net asset value had appreciated
to $12 per share, the value of the investor's shares would
be $1,260 (105 shares at $12 per share). The deferred sales
charge would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend
shares ($60). Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be charged at a rate of
4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
Waivers of Deferred Sales Charge. The deferred sales charge
will be waived on: (a) exchanges (see ''Exchange
Privilege''); (b) automatic cash withdrawals in amounts
equal to or less than 1.00% per month of the value of the
shareholder's shares at the time the withdrawal plan
commences (see ''Automatic Cash Withdrawal Plan'')
(automatic cash withdrawals in amounts equal to or less than
2.00% per month of the value of the shareholder's shares
will be permitted for withdrawal plans that were established
prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the
shareholder; (d) redemptions of shares made in connection
with qualified distributions from retirement plans or IRAs
upon the attainment of age 591/2; (e) involuntary
redemptions; and (f) redemptions of shares to effect the
combination of the fund with any other investment company by
merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other funds of the
Smith Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within 60
days and receive pro rata credit for any deferred sales
charge imposed on the prior redemption.
Deferred sales charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of
shareholders who are also Salomon Smith Barney clients or by
the transfer agent in the case of all other shareholders) of
the shareholder's status or holdings, as the case may be.
Smith Barney 401(k) and ExecChoice(tm) Programs. Investors may
be eligible to participate in the Smith Barney 401(k)
Program or the Smith Barney ExecChoiceTM Program. To the
extent applicable, the same terms and conditions, which are
outlined below, are offered to all plans participating
(''Participating Plans'') in these programs.
The fund offers to Participating Plans Class A, Class L and
Class O shares as investment alternatives under the Smith
Barney 401(k) and ExecChoiceTM Programs. Class A, Class L
and Class O shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as
the Class A, Class L and Class O shares acquired by other
investors; however, they are not subject to any initial
sales charge or deferred sales charge. Once a Participating
Plan has made an initial investment in the fund, all of its
subsequent investments in the fund must be in the same Class
of shares, except as otherwise described below.
Class A Shares. Class A shares of the fund are offered
without any sales charge or deferred sales charge to any
Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney
Mutual Funds.
Class L and O Shares. Class L and O shares of the fund are
offered without any sales charge or deferred sales charge to
any Participating Plan that purchases less than $1,000,000
of Class L and/or O shares of one or more funds of the Smith
Barney Mutual Funds. Class O shares may only be purchased
by plans if the plan opened its account on or before June
12, 1998.
401(k) and ExecChoice(tm) Plans Opened On or After June 21,
1996. If, at the end of the fifth year after the date the
Participating Plan enrolled in the Smith Barney 401(k)
Program or ExecChoice(tm) Program, a Participating Plan's total
Class L and/or O holdings in all non-money market Smith
Barney Mutual Funds equal at least $1,000,000, the
Participating Plan will be offered the opportunity to
exchange all of its Class L and/or O shares for Class A
shares of the fund. (For Participating Plans that were
originally established through a Salomon Smith Barney retail
brokerage account, the five-year period will be calculated
from the date the retail brokerage account was opened.) Such
Participating Plans will be notified of the pending exchange
in writing within 30 days after the fifth anniversary of the
enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the
90th day after the fifth anniversary date. If the
Participating Plan does not qualify for the five-year
exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth
year.
401(k) Plans Opened Prior to June 21, 1996. In any year
after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class L and/or O
holdings in all non-money market Smith Barney Mutual Funds
equal at least $500,000 as of the calendar year-end, the
Participating Plan will be offered the opportunity to
exchange all of its Class L and/or O shares for Class A
shares of the same fund. Such Plans will be notified in
writing within 30 days after the last business day of the
calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the
last business day of the following March.
Any Participating Plan in the Smith Barney 401(k) or
ExecChoice(tm) Program, whether opened before or after June 21,
1996, that has not previously qualified for an exchange into
Class A shares will be offered the opportunity to exchange
all of its Class L and/or O shares for Class A shares of the
same fund regardless of asset size, at the end of the eighth
year after the date the Participating Plan enrolled in the
Smith Barney 401(k) or ExecChoice(tm) Program. Such Plans will
be notified of the pending exchange in writing approximately
60 days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date.
Once an exchange has occurred, a Participating Plan will not
be eligible to acquire additional Class L and/or O shares,
but instead may acquire Class A shares of the same fund. Any
Class L and/or O shares not converted will continue to be
subject to the distribution fee.
Participating Plans wishing to acquire shares of the fund
through the Smith Barney 401(k) Program or the Smith Barney
ExecChoice(tm) Program must purchase such shares directly from
the transfer agent. For further information regarding these
Programs, investors should contact a Salomon Smith Barney
Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares: Class B
shares of the fund are not available for purchase by
Participating Plans opened on or after June 21, 1996, but
may continue to be purchased by any Participating Plan in
the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares
acquired are subject to a deferred sales charge of 3.00% of
redemption proceeds if the Participating Plan terminates
within eight years of the date the Participating Plan first
enrolled in the Smith Barney 401(k) Program.
At the end of the eighth year after the date the
Participating Plan enrolled in the Smith Barney 401(k)
Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class
A shares of the fund. Such Participating Plan will be
notified of the pending exchange in writing approximately 60
days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date.
Once the exchange has occurred, a Participating Plan will
not be eligible to acquire additional Class B shares, but
instead may acquire Class A shares of the same fund. If the
Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the
Participating Plan will have the same conversion feature as
Class B shares held by other investors. See ''Purchase of
Shares-Deferred Sales Charge Alternatives.''
No deferred sales charge is imposed on redemptions of Class
B shares to the extent the net asset value of the shares
redeemed does not exceed the current net asset value of the
shares purchased through reinvestment of dividends or
capital gain distributions, plus the current net asset value
of Class B shares purchased more than eight years prior to
the redemption, plus increases in the net asset value of the
shareholder's Class B shares above the purchase payments
made during the preceding eight years. Whether or not the
deferred sales charge applies to the redemption by a
Participating Plan depends on the number of years since the
Participating Plan first became enrolled in the Smith Barney
401(k) Program, unlike the applicability of the deferred
sales charge to redemptions by other shareholders, which
depends on the number of years since those shareholders made
the purchase payment from which the amount is being
redeemed.
The deferred sales charge will be waived on redemptions of
Class B shares in connection with lump-sum or other
distributions made by a Participating Plan as a result of:
(a) the retirement of an employee's in the Participating
Plan; termination of employment, death, disability, or
attainment of age 59 1/2; (b) hardship of an employee in the
Participating Plan to the extent permitted under Section
401(k) of the Code; or (c) redemptions of shares in
connection with a loan made by the Participating Plan to an
employee.
Determination of Public Offering Prices
The trust offers shares of the fund to the public on a
continuous basis. The public offering price for a Class A
and Class Y shares of the fund is equal to the net asset
value per share at the time of purchase, plus for Class A
shares an initial sales charge based on the aggregate amount
of the investment. The public offering price for a Class B
share (and Class A share purchases, including applicable
rights of accumulation, equaling or exceeding $500,000), is
equal to the net asset value per share at the time of
purchase and no sales charge is imposed at the time of
purchase. A deferred sales charge, however, is imposed on
certain redemptions of Class B and Class O shares and of
Class A shares when purchased in amounts exceeding $500,000.
The method of computation of the public offering price is
shown in the fund's financial statements incorporated by
reference in their entirety into this SAI.
Exchange Privilege
As your needs change, you may wish to reposition your
investments. With Smith Barney Mutual Funds, you have the
ability to exchange shares of most Smith Barney mutual funds
for those of others within the family.
Except as otherwise noted below, shares of each Class of the
fund may be exchanged for shares of the same Class of
certain Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence.
Exchanges of Class A, Class B, Class L and Class O shares
are subject to minimum investment requirements and all
shares are subject to the other requirements of the fund
into which exchanges are made.
Class B Exchanges. In the event a Class B shareholder
wishes to exchange all or a portion of his or her shares in
any fund imposing a higher deferred sales charge than that
imposed by the fund, the exchanged Class B shares will be
subject to the higher applicable deferred sales charge. Upon
an exchange, the new Class B shares will be deemed to have
been purchased on the same date as the Class B shares of the
fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares
will be deemed to have been purchased on the same date as
the Class L shares of the fund that have been exchanged.
Class O Exchanges. Class O shares may only be exchanged for
Class L shares of another fund. Upon an exchange, the new
Class L shares will be deemed to have been purchased on the
same date as the Class O shares of the fund that have been
exchanged.
Class A and Class Y Exchanges. Class A and Class Y
shareholders of the fund who wish to exchange all or a
portion of their shares for shares of the respective Class
in any of the funds identified above may do so without
imposition of any charge.
The exchange privilege enables shareholders to acquire
shares of the same Class in the fund with different
investment objectives when they believe a shift between
funds is an appropriate investment decision. This privilege
is available to shareholders residing in any state in which
the fund shares being acquired may legally be sold. Prior
to any exchange, the shareholder should obtain and review a
copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained
from a Salomon Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are
redeemed at the then-current net asset value and, subject to
any applicable deferred sales charge, the proceeds are
immediately invested, at a price as described above, in
shares of the fund being acquired. Salomon Smith Barney
reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time
after written notice to shareholders.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit,
excessive exchange transactions can be detrimental to the
fund's performance and its shareholders. The Investment
Adviser may determine that a pattern of frequent exchanges
is excessive and contrary to the best interests of the
fund's other shareholders. In this event, the fund may, at
its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the
fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the
shareholder will be required to (a) redeem his or her shares
in the fund or (b) remain invested in the fund or exchange
into any of the funds of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would
be expected to maintain for a significant period of time.
All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See ''Redemption of Shares-Telephone Redemption
and Exchange Program.'' Exchanges will be processed at the
net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares,
and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of
the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no
signature guarantee is required. An exchange involves a
taxable redemption of shares, subject to the tax treatment
described in "Taxes" below, followed by a purchase of shares
of a different fund. Before exchanging shares, investors
should read the current prospectus describing the shares to
be acquired. The fund reserves the right to modify or
discontinue exchange privileges upon 60 days' prior notice
to shareholders.
Redemption of Shares
The fund is required to redeem the shares of the fund
tendered to it, as described below, at a redemption price
equal to their net asset value per share next determined
after receipt of a written request in proper form at no
charge other than any applicable deferred sales charge.
Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value next
determined. The right of redemption of shares of the fund
may be suspended or the date of payment postponed (a) for
any periods during which the NYSE is closed (other than for
customary weekend and holiday closings), (b) when trading in
the markets the fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal
of the fund's investments or determination of its net asset
value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for the protection of
the fund's shareholders.
If a shareholder holds shares in more than one Class, any
request for redemption must specify the Class being
redeemed. In the event of a failure to specify which Class,
or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the
transfer agent receives further instructions from Salomon
Smith Barney, or if the shareholder's account is not with
Salomon Smith Barney, from the shareholder directly. The
redemption proceeds will be remitted on or before the third
business day following receipt of proper tender, except on
any days on which the NYSE is closed or as permitted under
the 1940 Act in extraordinary circumstances. Generally, if
the redemption proceeds are remitted to a Salomon Smith
Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of
temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which
may take up to ten days or more.
Shares held by Salomon Smith Barney as custodian must be
redeemed by submitting a written request to a Salomon Smith
Barney Financial Consultant. Shares other than those held by
Salomon Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or
dealer in the selling group or by submitting a written
request for redemption to:
Smith Barney Premium Total Return Fund
Class A, B, L, O or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and
number or dollar amount of shares to be redeemed, (b)
identify the shareholder's account number and (c) be signed
by each registered owner exactly as the shares are
registered. If the shares to be redeemed were issued in
certificate form, the certificates must be endorsed for
transfer (or be accompanied by an endorsed stock power) and
must be submitted to the transfer agent together with the
redemption request. Any signature appearing on a share
certificate, stock power or written redemption request in
excess of $2,000 must be guaranteed by an eligible guarantor
institution, such as a domestic bank, savings and loan
institution, domestic credit union, member bank of the
Federal Reserve System or member firm of a national
securities exchange. Written redemption requests of $2,000
or less do not require a signature guarantee unless more
than one such redemption request is made in any 10-day
period. Redemption proceeds will be mailed to an investor's
address of record. The transfer agent may require
additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly
received until the transfer agent receives all required
documents in proper form.
Automatic Cash Withdrawal Plan. The fund offers
shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000
($5,000 for retirement plan accounts) may elect to receive
cash payments of at least $50 monthly or quarterly.
Retirement plan accounts are eligible for automatic cash
withdrawal plans only where the shareholder is eligible to
receive qualified distributions and has an account value of
at least $5,000. The withdrawal plan will be carried over
on exchanges between funds or Classes of the fund. Any
applicable deferred sales charge will not be waived on
amounts withdrawn by a shareholder exceeding 1.00% per month
of the value of the shareholder's shares subject to the
deferred sales charge at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect
prior to November 7, 1994, any applicable deferred sales
charge will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's
shares subject to the deferred sales charge.) To the extent
withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in the fund, there will be a
reduction in the value of the shareholder's investment and
continued withdrawal payments may reduce the shareholder's
investment and ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in the
fund. Withdrawals involve share redemptions that may have
tax consequences for shareholders. Furthermore, as it
generally would not be advantageous to a shareholder to make
additional investments in the fund at the same time he or
she is participating in the Withdrawal Plan with respect to
that fund, purchases by such shareholders of additional
shares in the fund in amounts less than $5,000 will not
ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan
and who hold their shares in certificate form must deposit
their share certificates of the fund from which withdrawals
will be made with First Data Investors Services Group, Inc.
("First Data"), as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan
are reinvested automatically at net asset value in
additional shares of the fund. All applications for
participation in the Withdrawal Plan must be received by
First Data as Plan Agent no later than the eighth day of
each month to be eligible for participation beginning with
that month's withdrawal. For additional information
regarding the Withdrawal Plan, contact your Salomon Smith
Barney Financial Consultant.
Telephone Redemption and Exchange Program. Shareholders who
do not have a brokerage account may be eligible to redeem
and exchange shares by telephone. To determine if a
shareholder is entitled to participate in this program, he
or she should contact the transfer agent at 1-800-451-2010.
Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by the transfer
agent upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account
application with the applicant's signature guarantee when
making his/her initial investment in the fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of shares of the fund may be made by
eligible shareholders by calling the transfer agent at 1-
800-451-2010. Such requests may be made between 9:00 a.m.
and 5:00 p.m. (New York City time) on any day the NYSE is
open. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted
under this program.
A shareholder will have the option of having the redemption
proceeds mailed to his/her address of record or wired to a
bank account predesignated by the shareholder. Generally,
redemption proceeds will be mailed or wired, as the case may
be, on the next business day following the redemption
request. In order to use the wire procedures, the bank
receiving the proceeds must be a member of the Federal
Reserve System or have a correspondent relationship with a
member bank. The fund reserves the right to charge
shareholders a nominal fee for each wire redemption. Such
charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds,
a shareholder must complete a new Telephone/Wire
Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a
signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the account registration of the shares of the
fund being acquired is identical to the registration of the
shares of the fund exchanged. Such exchange requests may be
made by calling the transfer agent at 1-800-451-2010 between
9:00 a.m. and 5:00 p.m. (New York City time) on any day on
which the NYSE is open.
Additional Information Regarding Telephone Redemption and
Exchange Program. Neither the fund nor any of its agents
will be liable for following instructions communicated by
telephone that are reasonably believed to be genuine. The
fund and its agents will employ procedures designed to
verify the identity of the caller and legitimacy of
instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded).
The fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange program or
to impose a charge for this service at any time following at
least seven (7) days' prior notice to shareholders.
Redemptions in Kind. In conformity with applicable rules of
the SEC, redemptions may be paid in portfolio securities, in
cash or any combination of both, as the Board of Trustees
may deem advisable; however, payments shall be made wholly
in cash unless the Board of Trustees believes that economic
conditions exist that would make such a practice detrimental
to the best interests of the fund and its remaining
shareholders. If the Board of Trustees of the trust
determines that it would be detrimental to the best
interests of the remaining shareholders of the fund to make
a redemption payment wholly in cash, the trust may pay, in
accordance with SEC rules, any portion of a redemption in
excess of the lesser of $250,000 or 1% of the fund's net
assets by distribution in kind of portfolio securities in
lieu of cash. Shareholders may incur brokerage commissions
when they subsequently sell those securities. If a
redemption is paid in portfolio securities, such securities
will be valued in accordance with the procedures described
under "Share Price" in the Prospectus and a shareholder
would incur brokerage expenses if these securities were then
converted to cash.
DISTRIBUTOR
CFBDS, Inc. ("CFBDS") 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.
PART C-Other Information
Item 23. Exhibits
All references are to the Registrant's registration statement on
Form N-1A (the "Registration Statement") as filed with the Securities
and Exchange Commission (the "SEC") on March 13, 1985
(File Nos. 2-96408 and 811-4254).
(a)(1)Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to
the Master Trust Agreement dated July 30, 1993 are
incorporated by reference to Post-Effective Amendment No.
36.
(2)Amendment to Registrant's Master Trust Agreement dated June 12, 1998
is incorporated by reference to Post-Effective Amendment No. 52.
(b) Registrant's By-Laws are incorporated by reference to the Registration
Statement.
(c) Registrant's form of stock certificate for Smith Barney
Total Return Bond Fund Class A, Class B, Class C and Class
Y shares of beneficial interest is incorporated by reference to Post-Effective
Amendment No. 52.
(d)(1) Transfer of Investment Advisory Agreements between the
Registrant and Smith Barney Mutual Funds Management with
respect to Smith Barney Diversified Strategic Income Fund,
Smith Barney Utilities Fund, Smith Barney Convertible
Securities Fund, Smith Barney High Income Fund, Smith
Barney Tax-Exempt Income Fund and Smith Barney Exchange
Reserve Fund are incorporated by reference to Post-
Effective Amendment No. 40.
(2) Investment Advisory Agreement between Registrant and Smith
Barney Strategy Advisers Inc. with respect to Smith Barney
Premium Total Return Fund is incorporated by reference to
Post-Effective Amendment No. 41 to the Registration
Statement.
(3) Form of Investment Management Agreement between Registrant
and Mutual Management Corp. with respect to Smith Barney
Total Return Bond Fund is incorporated by reference to Post-Effective Amendment
No. 52.
(4) Sub-Investment Advisory Agreement among the Registrant,
Smith Barney Strategy Advisers, Inc. and Boston Partners
Asset Management, L.P. with respect to Smith Barney Premium
Total Return Fund is incorporated by reference to Post-
Effective Amendment No. 41 to the Registration Statement.
(5) Sub-Investment Advisory Agreement between the Registrant
and Smith Barney Global Capital Management Inc. with
respect to Smith Barney Diversified Strategic Income Fund
is incorporated by reference to Post-Effective Amendment
No. 40.
(6) Form of Transfer and Assumption of Advisory Agreement is incorporated
by reference to Post-Effective Amendment No. 53("Post-Effective Amendment
No. 53") to the Registration Statement.
(7) Sub-Investment Advisory Agreement between the Registrant
and Salomon Brothers Asset Management Inc. with respect to Smith Barney
Premium Total Return Fund is filed herein.
(e)(1)Distribution Agreement between the Registrant and Smith
Barney Inc. is incorporated by reference to the Post-
Effective Amendment No. 40.
(2) Distribution Agreement between the Registrant and PFS
Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(3) Distribution Agreement between the Registrant and CFBDS, Inc. dated
October 8, 1998 is incorporated by reference to Post-Effective Amendment No. 52.
(4) Selling Group Agreement is filed herein.
(f) Not Applicable.
(g)(1)Custodian Agreement between the Registrant and PNC Bank, National
Association ("PNC Bank") is incorporated by reference to Post-Effective
Amendment No. 41 to the Registration Statement.
(2) A form of Custodian Agreement between the Registrant and
Chase Manhattan Bank is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(h)(1) Administration Agreement between the Registrant and MMC is
incorporated by reference to Post-Effective Amendment No.
40.
(2) Transfer Agency and Registrar Agreement between the
Registrant and First Data Investor Services Group, Inc.,
(formerly The Shareholder Services Group, Inc.) is
incorporated by reference to Post-Effective Amendment No.
40 to the Registration Statement.
(i) Opinion of Counsel was filed with Registrant's 24f-2
Notice on February 25, 1997 as accession number
0000091155-97-000095.
(j) Consent of Independent Auditors is filed herein.
(k) Not applicable.
(l) Not applicable.
(m)(1)Services and Distribution Plans pursuant to Rule
12b-1 between the Registrant on behalf of Smith Barney
Diversified Strategic Income Fund, Smith Barney Utilities
Fund, Smith Barney Convertible Securities Fund, Smith
Barney High Income Fund, Smith Barney Premium Total Return
Fund, Smith Barney Tax-Exempt Income Fund and Smith Barney
Exchange Reserve Fund are incorporated by reference to
Post-Effective Amendment No. 40.
(2) Form of Amended Service and and Distribution Plan pursuant to Rule
12b-1 between the Registrant and Salomon Smith Barney Inc. is
incorporated by reference to Post-Effective Amendment No. 52.
(n) Financial Data Schedule to be filed by amendment.
(o) Amended Plan pursuant to Rule 18f-3(d) is incorporated by reference
to Post-Effective Amendment No. 52.
Item 24. Persons Controlled by or Under Common Control with
Registrant
None.
Item 25. Indemnification
The response to this item is incorporated by reference to Registrant's
Post-Effective Amendment No. 2 to the Registration Statement.
Item 26. Business and Other Connections of Investment Adviser
Investment Adviser - SSBC Fund Management Inc. ("SSBC")
SSBC, formerly known as Mutual Management Corp.,
was incorporated in December 1968 under the laws of the
State of Delaware. SSBC is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. ("Holdings") (formerly known as Smith
Barney Holdings Inc.), which in turn is a wholly owned
subsidiary of Citigroup Inc. ("Citigroup"). SSBC is registered
as an investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 26 of officers and directors of
SSBC together with information as to any other business,
profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two
fiscal years, is incorporated by reference to Schedules A and D
of FORM ADV filed by SSBC pursuant to the Advisers Act (SEC File
No. 801-14437).
Item 27. Principal Underwriters
(a) CFBDS, Inc., ("CFBDS") the Registrant's Distributor, is also
the distributor for the following Smith Barney funds: Concert
Investment Series, Consulting Group Capital Markets Funds,
Greenwich Street Series Fund, Smith Barney Adjustable Rate
Government Income Fund, Smith Barney Aggressive Growth Fund Inc.,
Smith Barney Appreciation Fund Inc., Smith Barney Arizona
Municipals Fund Inc., Smith Barney California Municipals Fund
Inc., Smith Barney Concert Allocation Series Inc., Smith Barney
Equity Funds, Smith Barney Fundamental Value Fund Inc., Smith
Barney Funds, Inc., Smith Barney Income Funds, Smith Barney
Institutional Cash Management Fund, Inc., Smith Barney Investment
Funds Inc., Smith Barney Investment Trust, Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund Inc.,
Smith Barney Massachusetts Municipals Fund, Smith Barney Money
Funds, Inc., Smith Barney Muni Funds, Smith Barney Municipal Money
Market Fund, Inc., Smith Barney New Jersey Municipals Fund Inc.,
Smith Barney Oregon Municipals Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Trust, Smith Barney Variable Account Funds,
Smith Barney World Funds, Inc., Travelers Series Fund Inc., and
various series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for
Variable Annuities, The Travelers Fund BD for Variable Annuities, The
Travelers Fund BD II for Variable Annuities, The Travelers Fund BD
III for Variable Annuities, The Travelers Fund BD IV for Variable
Annuities, The Travelers Fund ABD for Variable Annuities, The
Travelers Fund ABD II for Variable Annuities, The Travelers Separate
Account PF for Variable Annuities, The Travelers Separate Account PF
II for Variable Annuities, The Travelers Separate Account QP for
Variable Annuities, The Travelers Separate Account TM for Variable
Annuities, The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable
Annuities, The Travelers Separate Account Six for Variable Annuities,
The Travelers Separate Account Seven for Variable Annuities, The
Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL II
for Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance Separate
Account Two, The Travelers Variable Life Insurance Separate Account
Three, The Travelers Variable Life Insurance Separate Account Four,
The Travelers Separate Account MGA, The Travelers Separate Account
MGA II, The Travelers Growth and Income Stock Account for Variable
Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The
Travelers Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable
Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds
Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III,
CitiFunds International Trust, CitiFunds Fixed Income Trust,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term
Portfolio, Growth & Income Portfolio, U.S. Fixed Income Portfolio,
Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio,
Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon
Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc.,
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional
Series Funds Inc., Salomon Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds,
Inc.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS is incorporated by reference to
Schedule A of Form BD filed by CFBDS pursuant to the Securities and
Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) Salomon Smith Barney Inc.388 Greenwich Street
New York, New York 10013
(2) Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013
(3) SSBC Fund Management Inc.
388 Greenwich Street
New York, New York 10013
(4) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(5) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(6) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
(7) PFS Distributors Inc.
3100 Breckinridge Boulevard
Building 200
Duluth, Georgia 30099-0062
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "
Securities Act"), as amended, and the Investment Company Act of 1940,
as amended, the Registrant, SMITH BARNEY INCOME FUNDS, certifies that it
meets all of the requirements for effectiveness of this registration
statement under rule 485(b) under the Securities Act has duly caused
this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, all in the City of New York,
State of New York on the 30th day of April,
1999.
SMITH BARNEY INCOME FUNDS
By:/s/ Heath B. McLendon
Heath B. McLendon, Chairman of
the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/Heath B. McLendon Chairman of the Board, 4/30/99
Heath B. McLendon President and Chief
Executive Officer
/s/Lewis E. Daidone Senior Vice President, 4/30/99
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Lee Abraham* Trustee 4/30/99
Lee Abraham
/s/ Allan J. Bloostein* Trustee 4/30/99
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee 4/30/99
Richard E. Hanson
/s/ Jane F.Dasher Trustee 4/30/99
Jane F.Dasher
/s/ Donald R. Foley Trustee 4/30/99
Donald R. Foley
/s/ Paul Hardin Trustee 4/30/99
Paul Hardin
/s/ Roderick Rasmussen Trustee 4/30/99
Roderick Rasmussen
/s/ John P. Toolan Trustee 4/30/99
John P. Toolan
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney dated September 4, 1996.
/s/Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibits
(d) (7) Sub-Investment Advisory Agreement
(e)(4) Selling Group Agreement
(j) Consent of KPMG Peat Marwick LLP
(n) Financial Date Schedule
cover
INTERIM SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY INCOME FUNDS
(Smith Barney Premium Total Return Fund)
April 23, 1999
Salomon Brothers Asset Management, Inc.
Seven World Trade Center
New York, New York 10048
Dear Sirs:
Smith Barney Income Funds, a trust organized under
the laws of the of the Commonwealth of Massachusetts (the
"Trust"), and SSBC Fund Management Inc. (the "Adviser")
each confirms its agreement with Salomon Brothers Asset
Management, Inc. (the "Interim Sub-Adviser ") as follows:
1. Investment Description; Appointment
The Trust desires to employ its capital relating to
Smith Barney Premium Total Return Fund ("the Fund") by
investing and reinvesting in investments of the kind and in
accordance with the investment objective(s), policies and
limitations specified in its Master Trust Agreement, as
amended from time to time (the "Master Trust Agreement"),
in the Prospectus (the "Prospectus") and the Statement of
Additional Information (the "Statement") filed with the
Securities and Exchange Commission as part of the Trust's
Registration Statement on Form N-1A, as amended from time
to time, and in the manner and to the extent as may from
time to time be approved by the Board of Trustees of the
Trust (the "Board"). Copies of the Prospectus, the
Statement and the Master Trust Agreement have been or will
be submitted to the Interim Sub-Adviser. The Trust agrees
to provide copies of all amendments to the Prospectus, the
Statement and the Master Trust Agreement to the Interim
Sub-Adviser on an on-going basis. The Trust employs the
Adviser as the investment adviser to the Fund, and the
Trust and the Adviser desire to employ and hereby appoint
the Interim Sub-Adviser to act as the sub-investment
adviser to the Fund for a period of 120 days to commence on
April 26, 1999. The Interim Advisor accepts the appointment
and agrees to furnish the services for the compensation set
forth below.
2. Services as Interim Sub-Investment Adviser
Subject to the supervision, direction and approval
of the Board of the Trust and the Adviser, the Interim
Sub-Adviser will: (a) manage the Fund's portfolio in
accordance with the Fund's investment objective(s) and
policies as stated in the Master Trust Agreement, the
Prospectus and the Statement; (b) make investment
decisions for the Fund; (c) place purchase and sale orders
for portfolio transactions for the Fund; and (d) employ
professional portfolio managers and securities analysts
who provide research services to the Fund. In providing
those services, the Interim Sub-Adviser will conduct a
continual program of investment, evaluation and, if
appropriate, sale and reinvestment of the Fund's assets.
3. Brokerage
In selecting brokers or dealers to execute
transactions on behalf of the Fund, the Interim Sub-Adviser
will seek the best overall terms available. In assessing
the best overall terms available for any transaction, the
Interim Sub-Adviser will consider factors it deems
relevant, including, but not limited to, 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
selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms
available, the Interim Sub-Adviser is authorized to
consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) provided to the Fund and/or other
accounts over which the Interim Sub-Adviser or its
affiliates exercise investment discretion.
4. Information Provided to the Trust
The Interim Sub-Adviser will keep the Adviser and the
Trust informed of developments materially affecting the
Fund and will, on its own initiative, furnish the Adviser
and the Trust from time to time with whatever information
Interim Sub-Adviser believes is appropriate for this
purpose.
5. Standard of Care
The Interim Sub-Adviser shall exercise its best
judgment in rendering the services listed in paragraphs 2
and 3 above. The Interim Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss
suffered by the Fund and the Adviser in connection with the
matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or
purport to protect the Interim Sub-Adviser against any
liability to the Adviser, the Trust or the shareholders of
the Fund to which the Interim Sub-Adviser would otherwise
be subject by reason of willful misfeasance, bad faith or
gross negligence on its part in the performance of its
duties or by reason of the Interim Sub-Adviser's reckless
disregard of its obligations and duties under this
Agreement.
6. Compensation
In consideration of the services rendered pursuant to
this Agreement, the Adviser will pay the Interim Sub-
Adviser on the first business day of each month a fee for
the previous month at an annual rate of 0.15% of 1.00% of
the Fund's average daily net assets such payments to
commence on June 14, 1999. The fee for the period from
June 14, 1999, to the end of that month shall be prorated
according to the proportion that such period bears to the
full monthly period. Upon any termination of this
Agreement before the end of any month, the fee for such
part of that month shall be prorated according to the
proportion that such period bears to the full monthly
period and shall be payable upon the date of termination of
this Agreement. For the purpose of determining fees
payable to the Interim Sub-Adviser, the value of the Fund's
net assets shall be computed at the times and in the manner
specified in the Prospectus and/or the Statement.
7. Expenses
The Interim Sub-Adviser will bear all expenses in
connection with the performance of its services under this
Agreement. The Fund will bear certain other expenses to be
incurred in its operation, including, but not limited to,
investment advisory fees paid to the Advisor,
administration fees; fees for necessary professional
services and brokerage services; fees for any pricing
service; the costs of regulatory compliance; and costs
associated with maintaining the Trust's legal existence and
shareholder relations.
8. Services to Other Companies or Accounts
The Trust understands that the Interim Sub-Adviser
now acts, will continue to act and may act in the future as
investment adviser to fiduciary and other managed accounts,
and as investment adviser to other investment companies,
and the Trust has no objection to the Interim Sub-Adviser's
so acting, provided that whenever the Fund and one or more
other investment companies advised by the Interim Sub-
Adviser have available funds for investment, investments
suitable and appropriate for each will be allocated in
accordance with a formula believed to be equitable to each
trust. The Trust recognizes that in some cases this
procedure may adversely affect the size of the position
obtainable for the Fund. In addition, the Trust
understands that the persons employed by the Interim Sub-
Adviser to assist in the performance of the Interim Sub-
Adviser's duties under this Agreement will not devote their
full time to such service and nothing contained in this
Agreement shall be deemed to limit or restrict the right of
the Interim Sub-Adviser or any affiliate of the Interim
Sub-Adviser to engage in and devote time and attention to
other businesses or to render services of whatever kind or
nature.
9. Term of Agreement
This Interim Agreement shall become effective as of
April 26, 1999 (the " Effective Date") and continue for a
period of 120 days or upon the approval of the interim sub-
advisor as the sub-advisor by a vote of a "majority" (as
that term is defined in the Investment Trust Act of 1940,
as amended (the "1940 Act") of the Fund's outstanding
voting securities. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the
Trust or by vote of holders of a majority of the Fund's
shares, or upon 90 days' written notice, by the Interim
Sub-Adviser. This Agreement will also terminate
automatically in the event of its assignment (as defined in
the 1940 Act and the rules thereunder).
10. Representation by the Trust
The Trust represents that a copy of the Master Trust
Agreement is on file with the Secretary of the Commonwealth
of Massachusetts and with the Boston City Clerk.
11. Limitation of Liability
The Trust the Adviser and the Interim Sub-Adviser
agree that the obligations of the Trust under this
Agreement shall not be binding upon any of the members of
the Board, shareholders, nominees, officers, employees or
agents, whether past, present or future, of the Trust,
individually, but are binding only upon the assets and
property of the Fund and not upon the assets and property
of any other portfolio of theTrust. The execution and
delivery of this Agreement have been authorized by the
Board and signed by an authorized officer of the Trust,
acting as such, and neither such authorization by the such
members of the Board nor such execution and delivery by
such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them
personally, but shall bind only the assets and property of
the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your
understanding, kindly indicate your acceptance of this
Agreement by signing and returning the enclosed copy of
this Agreement.
Very truly yours,
SMITH BARNEY INCOME
FUNDS
on behalf of its
Smith Barney Premium
Total Return Fund
By:
_______________________________
Name: Heath B.
McLendon
Title: Chairman of
the Board
SSBC Fund Management
Inc.
By:
_______________________________
Name: Heath B.
McLendon
Title: Chairman of
the Board
Accepted:
Salomon Brothers Asset Management, Inc.
By: ___________________________________
Name:
Title:
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<PER-SHARE-DIVIDEND> (00.27)
<PER-SHARE-DISTRIBUTIONS> (1.89)
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</TABLE>
SMITH BARNEY MUTUAL FUNDS
BROKER DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements
with certain investment companies for which Mutual
Management Corp. serves as investment adviser and/or
administrator (each a "Fund") pursuant to which we act
as nonexclusive principal underwriter and distributor for
the sale of shares of capital stock ("shares") of the
various series of such Funds, and as such have the right
to distribute shares for resale. Each Fund is an open-
end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act") and the
shares being offered to the public are registered under
the Securities Act of 1933, as amended (the "1933 Act").
Each series of each Fund covered by a Distribution
Agreement from time to time is referred to in this
agreement as a "Series" and collectively as the "Series."
The term "Prospectus", as used herein, refers to the
prospectus and related statement of additional
information (the "Statement of Additional Information")
incorporated therein by reference (as amended or
supplemented) on file with the Securities and Exchange
Commission at the time in question. As a broker in the
capacity of principal underwriter and distributor for the
Trust, we offer to sell to you, as a broker or dealer,
shares of each Fund upon the following terms and
conditions:
1. In all sales to the public you shall act
as broker for your customers or as dealer for your own
account, and in no transaction shall you have any
authority to act as agent for the Trust, for us or for
any other dealer.
2. Orders received from you will be
accepted through us only at the public offering price per
share (i.e. the net asset value per share plus the
applicable front-end sales charge, if any) applicable to
each order, and all orders for redemption of any shares
shall be executed at the net asset value per share less
any contingent deferred sales charge, if any, in each
case as set forth in the Prospectus. You will be
entitled to receive and retain any contingent deferred
sales charge amounts in partial consideration of your
payment to financial consultants of commission amounts at
the time of sale and we will obligate any other brokers
with whom we enter into similar agreements to pay such
amounts directly to you. The procedure relating to the
handling of orders shall be subject to paragraph 4 hereof
and instructions which we or the Fund shall forward from
time to time to you. All orders are subject to
acceptance or rejection by the applicable Fund or us in
the sole discretion of either. The minimum initial
purchase and the minimum subsequent purchase of any
shares shall be as set forth in the Prospectus pertaining
to the relevant Series.
3. You shall not place orders for any
shares unless you have already received purchase orders
for those shares at the applicable public offering price
and subject to the terms hereof. You agree that you will
not offer or sell any shares except under circumstances
that will result in compliance with the applicable
Federal and state securities laws, the applicable rules
and regulations thereunder and the rules and regulations
of applicable regulatory agencies or authorities and that
in connection with sales and offers to sell shares you
will furnish to each person to whom any such sale or
offer is made, a copy of the Prospectus and, upon
request, the Statement of Additional Information, and
will not furnish to any person any information relating
to shares which is inconsistent in any respect with the
information contained in the Prospectus or Statement of
Additional Information (as then amended or supplemented).
You shall not furnish or cause to be furnished to any
person or display or publish any information or materials
relating to the shares (including, without limitation,
promotional materials and sales literature,
advertisements, press releases, announcements,
statements, posters, signs or other similar material),
except such information and materials as may be furnished
to you by or on behalf of us or the Funds, and such other
information and materials as may be approved in writing
by or on behalf of us or the Funds.
4. As a broker dealer, you are hereby
authorized (i) to place orders directly with the
applicable Fund or Series for shares subject to the
applicable terms and conditions governing the placement
of orders by us set forth in the Prospectus and (ii) to
tender shares directly to each Fund or its agent for
redemption subject to the applicable terms and conditions
governing the redemption of shares applicable to us set
forth in the Prospectus.
5. You shall not withhold placing orders
received from your customers so as to profit yourself as
a result of such withholding, e.g., by a change in the
"net asset value" from that used in determining the
offering price to your customers.
6. In determining the amount of any sales
concession payable to you hereunder, we reserve the right
to exclude any sales which we reasonably determine are
not made in accordance with the terms of the Prospectus
and the provisions of this Agreement. Unless at the time
of transmitting an order we advise you or the transfer
agent to the contrary, the shares ordered will be deemed
to be the total holdings of the specified investor.
7. (a) You agree that payment for orders
from you for the purchase of shares will be made in
accordance with the terms of the Prospectus. On or
before the business day following the settlement date of
each purchase order for shares, you shall transfer same
day funds to an account designated by us with the
transfer agent in an amount equal to the public offering
price on the date of purchase of the shares being
purchased less your sales concession, if any, with
respect to such purchase order determined in accordance
with the Prospectus. If payment for any purchase order
is not received in accordance with the terms of the
Prospectus, we reserve the right, without notice, to
cancel the sale and to hold you responsible for any loss
sustained as a result thereof.
(b) If any shares sold under the terms of
this Agreement are sold with a sales charge and are
redeemed or are tendered for redemption within seven (7)
business days after confirmation of your purchase order
for such shares: (i) you shall forthwith refund to us
the full sales concession received by you on the sale;
and (ii) we shall forthwith pay to the applicable Series
our portion of the sales charge on the sale which has
been retained by us, if any, and shall also pay to the
applicable Series the amount refunded by you.
(c) We will not be obligated to pay or cause
to be paid to you any ongoing trail commission or
shareholder service fees with respect to shares of the
Series purchased through you and held by or for your
customers, which you shall collect directly from the
Funds.
(d) Certificates evidencing shares shall be
available only upon request. Upon payment for shares in
accordance with paragraph 7(a) above, the transfer agent
will issue and transmit to you or your customer a
confirmation statement evidencing the purchase of such
shares. Any transaction in uncertificated shares,
including purchases, transfers, redemptions and
repurchases, shall be effected and evidenced by
book-entry on the records of the transfer agent.
8. No person is authorized to make any
representations concerning shares except those contained
in the current Prospectus and Statement of Additional
Information and in printed information subsequently
issued by us or the Funds as information supplemental to
the Prospectus and the Statement of Additional
Information. In purchasing or offering shares pursuant
to this Agreement you shall rely solely on the
representations contained in the Prospectus, the
Statement of Additional Information and the supplemental
information above mentioned.
9. You agree to deliver to each purchaser
making a purchase of shares from or through you a copy of
the Prospectus at or prior to the time of offering or
sale, and, upon request, the Statement of Additional
Information. You may instruct the transfer agent to
register shares purchased in your name and account as
nominee for your customers. You agree thereafter to
deliver to any purchaser whose shares you or your nominee
are holding as record holder copies of the annual and
interim reports and proxy solicitation materials and any
other information and materials relating to the Trust and
prepared by or on behalf of us, the Funds or the
investment adviser, custodian, transfer agent or dividend
disbursing agent for distribution to beneficial holders
of shares. The Funds shall be responsible for the costs
associated with forwarding such reports, materials and
other information and shall reimburse you in full for
such costs. You further agree to make reasonable efforts
to endeavor to obtain proxies from such purchasers whose
shares you or your nominee are holding as record holder.
You further agree to obtain from each customer to whom
you sell shares any taxpayer identification number
certification required under Section 3406 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder, and to provide us or
our designee with timely written notice of any failure to
obtain such taxpayer identification number certification
in order to enable the implementation of any required
backup withholding in accordance with Section 3406 of the
Code and the regulations thereunder. Additional copies
of the Prospectus, Statement of Additional Information,
annual or interim reports, proxy solicitation materials
and any such other information and materials relating to
the Trust will be supplied to you in reasonable
quantities upon request.
10. (a) In accordance with the terms of the
Prospectus, a reduced sales charge may be available to
customers, depending on the amount of the investment or
proposed investment. In each case where a reduced sales
charge is applicable, you agree to furnish to the
transfer agent sufficient information to permit
confirmation of qualification for a reduced sales charge,
and acceptance of the purchase order is subject to such
confirmation. Reduced sales charges may be modified or
terminated at any time in the sole discretion of each
Fund.
(b) You acknowledge that certain classes of
investors may be entitled to purchase shares at net asset
value without a sales charge as provided in the
Prospectus and Statement of Additional Information.
(c) You agree to advise us promptly as to
the amount of any and all sales by you qualifying for a
reduced sales charge or no sales charge.
(d) Exchanges (i.e., the investment of the
proceeds from the liquidation of shares of one Series in
the shares of another Series, each of which is managed by
the same or an affiliated investment adviser) shall,
where available, be made in accordance with the terms of
each Prospectus.
11. We and each Fund reserve the right in
our discretion, without notice, to suspend sales or
withdraw the offering of any shares entirely. Each party
hereto has the right to cancel the portions of this
Agreement to which it is party upon notice to the other
parties; provided, however, that no cancellation shall
affect any party's obligations hereunder with respect to
any transactions or activities occurring prior to the
effective time of cancellation. We reserve the right to
amend this Agreement in any respect effective on notice
to you.
12. We shall have full authority to take such
action as we may deem advisable in respect of all matters
pertaining to the continuous offering of shares. We shall
be under no liability to you except for lack of good faith
and for obligations expressly assumed by us herein. Nothing
contained in this paragraph 12 is intended to operate as,
and the provisions of this paragraph 12 shall not in any way
whatsoever constitute a waiver by you of compliance with,
any provisions of the 1933 Act or of the rules and
regulations of the Securities and Exchange Commission issued
thereunder.
13. You agree that: (a) you shall not
effect any transactions (including, without limitation,
any purchases and redemptions) in any shares registered
in the name of, or beneficially owned by, any customer
unless such customer has granted you full right, power
and authority to effect such transactions on his behalf,
(b) we shall have full authority to act upon your express
instructions to sell, repurchase or exchange shares
through us on behalf of your customers under the terms
and conditions provided in the Prospectus and (c) we, the
Funds, the investment adviser, the administrator, the
transfer agent and our and their respective officers,
directors or trustees, agents, employees and affiliates
shall not be liable for, and shall be fully indemnified
and held harmless by you from and against, any and all
claims, demands, liabilities and expenses (including,
without limitation, reasonable attorneys' fees) which may
be incurred by us or any of the foregoing persons
entitled to indemnification from you hereunder arising
out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or
beneficially owned by, any customer in reliance upon any
oral or written instructions believed to be genuine and
to have been given by or on behalf of you, (ii) any
statements or representations that you or your employees
or representatives make concerning the Funds that are
inconsistent with the applicable Fund's Prospectus, (iii)
any written materials used by you or your employees or
representatives in connection with making offers or sales
of shares that were not furnished by us, the Funds or the
investment adviser or an affiliate thereof and (iv) any
sale of shares of a Fund where the Fund or its shares
were not properly registered or qualified for sale in any
state, any U.S. territory or the District of Columbia,
when we have indicated to you that the Fund or its shares
were not properly registered or qualified. The
indemnification agreement contained in this Paragraph 13
shall survive the termination of this Agreement.
14. You represent that: (a) you are a
member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD"), or, if a foreign
dealer who is not eligible for membership in the NASD,
that (i) you will not make any sales of shares in, or to
nationals of, the United States of America, its
territories or its possessions, and (ii) in making any
sales of shares you will comply with the NASD's Conduct
Rules and (b) you are a member in good standing of the
Securities Investor Protection Corporation ("SIPC"). You
agree that you will provide us with timely written notice
of any change in your NASD or SIPC status.
15. We shall inform you as to the states or
other jurisdictions in which the Fund has advised us that
shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws
of such states, but we assume no responsibility or
obligation as to your qualification to sell shares in any
jurisdiction.
16. Any claim, controversy, dispute or
deadlock arising under this Agreement (collectively, a
"Dispute") shall be settled by arbitration administered
under the rules of the American Arbitration Association
("AAA") in New York, New York. Any arbitration and
award of the arbitrators, or a majority of them, shall be
final and the judgment upon the award rendered may be
entered in any state or federal court having jurisdiction.
No punitive damages are to be awarded.
17. All communications to us should be
sent, postage prepaid, to 21 Milk Street, Boston,
Massachusetts 02109 Attention: Philip Coolidge. Any
notice to you shall be duly given if mailed, telegraphed
or telecopied to you at the address specified by you
below. Communications regarding placement of orders for
shares should be sent, postage prepaid, to First Data
Investor Services Group, Inc., P.O. Box 5128,
Westborough, Massachusetts 01581-5128.
18. This Agreement shall be binding upon
both parties hereto when signed by us and accepted by you
in the space provided below.
19. This Agreement and the terms and
conditions set forth herein shall be governed by, and
construed in accordance with, the laws of the State of
New York.
CFBDS, INC.
By:
(Authorized
Signature)
Accepted:
Firm Name:
Address:
Accepted By (signature):
Name (print):
Title: Date:
u:\legal\general\forms\agreemts\dist12b-1\dealerag1.doc
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Premium Total Return Fund:
We consent to the use of our report dated February 8,
1999, with respect to Smith Barney Premium Total Return
Fund, incorporated herein by reference and to the
references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Auditors" in the
Statement of Additional Information.
KPMG LLP
New York, New York
April 27, 1999
