As filed with the Securities and Exchange Commission on September 29, 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. 55
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 56 [X]
SMITH BARNEY INCOME FUNDS
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212)816-6474
(Registrant's telephone number, including Area Code)
Christina T. Sydor
Secretary
Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013, 22nd Floor
(Name and address of agent for service)
(Approximate Date of Proposed Public Offering): Continuous
It is proposed that this filing becomes effective (check appropriate
box):
[ ] Immediately upon filing pursuant to paragraph 485(b)
[ ] on (date) pursuant to paragraph 485(b)
[ X ] 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
Smith Barney
Mutual Funds
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------------------
November 30, 1999 Balanced Fund
Class A, B, L, O and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Balanced Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 7
Management.................................................................. 8
Choosing a class of shares to buy........................................... 9
Comparing the fund's classes................................................ 10
Sales charges............................................................... 12
More about deferred sales charges........................................... 14
Buying shares............................................................... 15
Exchanging shares........................................................... 16
Redeeming shares............................................................ 18
Other things to know about share transactions............................... 20
Smith Barney 401(k) and ExecChoice(TM) programs............................. 22
Dividends, distributions and taxes.......................................... 23
Share price................................................................. 24
Financial highlights........................................................ 25
</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>
Investments, risks and performance
Investment objective
The fund seeks current income and long-term capital appreciation.
Principal investment strategies
Key investments The fund invests in both equity and debt securities. The fund
normally maintains approximately 60% of its portfolio in equity securities and
40% in fixed income securities. These percentages, however, may vary based on
the manager's outlook.
Equity investments will primarily consist of common stocks, but also may
include other types of equity securities, such as preferred stocks, warrants
and securities convertible into common stocks. Fixed income securities will
include securities issued by the U.S. government (or its agencies and instru-
mentalities), corporate securities, mortgage-backed and asset-backed securi-
ties. Although there are no restrictions on the maturity of the fund's
individual securities, the fund normally expects to maintain an average portfo-
lio maturity for the fixed income portion of its portfolio of between five and
15 years. The fund may invest up to 25% of its total assets in fixed income
securities rated below investment grade by a nationally rated statistical rat-
ing organization.
Selection process
Equity Investments
The fund invests in equity securities in a broad range of companies, industries
and sectors. The manager attempts to identify securities with favorable valua-
tions relative to their growth characteristics. This strategy is commonly known
as "growth at a reasonable price" and offers style diversification within a
single mutual fund. Specifically, the manager looks for:
.Long-term value, based on expected growth of earnings or cash flow and yield
characteristics
.Short-term, or tactical, attractiveness, based on earnings cycle analysis
.Favorable earnings estimate revision
Fixed Income Investments
The fund invests in a broad range of fixed-income securities. In selecting
individual fixed income securities for the fund's portfolio, the manager pri-
marily focuses on the relative yields of securities and at various maturities.
The manager looks for:
.Favorable sector and maturity weightings based on interest rate outlook
.Stable or improving credit quality
.Low price relative to credit and interest rate characteristics
Balanced Fund
2
<PAGE>
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 equity
portion of the fund
.Companies in which the fund invests fail to meet earnings expectations, fall
out of favor with investors, or other events depress the prices of their
securities
.Interest rates increase, causing the prices of fixed income securities to
decline, thereby reducing the value of the fixed income portion of the fund
.The issuer of a fixed income security owned by the fund defaults on its obli-
gation to pay principal and/or interest or has its credit rating downgraded
.As interest rates decline, the issuers of fixed income securities held by the
fund may pay principal earlier than scheduled or exercise a right to call the
securities, forcing the fund to reinvest in lower yielding securities. This
is known as prepayment or call risk
.As interest rates rise above the coupon rate on one or more fixed income secu-
rities held by the fund, the issuers of these securities may extend the
effective maturity date, causing increased price sensitivity. This is known
as extension risk
.The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
Below investment grade bonds, 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>
Risk/return bar chart*
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
[CLASS B BAR CHART APPEARS HERE]
1990 16.34%
1991 10.46%
1992 13.63%
1993 14.69%
1994 (9.52)%
1995 12.62%
1996 8.78%
1997 14.88%
1998 10.95%
This bar chart shows the performance of the fund's Class B shares for each of
the past 9 years. Class A, L, O and Y shares would have different performance
because of their different expenses. The performance information in the chart
does not reflect sales charges, which would reduce your return.
Quarterly returns (past 10 years):
Highest: xx% in quarter 199X; Lowest: xx% in quarter 199X. Year to date:
xx% through 9/30/99
Balanced Fund
4
<PAGE>
Risk/return table*
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 Index ("S&P 500 Index"), an unmanaged broad-based index
of widely held common stocks, and the Lehman Brothers Government/Corporate Bond
Index ("Lehman Gov/Corp Index"), an unmanaged index which tracks the perfor-
mance of the overall bond market. 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 n/a 11/06/92
B xx/xx/xx
L xx/xx/xx
O n/a n/a 11/07/94
Y n/a n/a 10/09/95
S&P 500 Index ** n/a
Lehman Gov/Corp Index ** n/a
</TABLE>
**Index comparisons begin on .
*[Prior to 1998, the fund was a utilities sector fund with different investment
goals, policies and strategies and different portfolio managers.]
Smith Barney Mutual Funds
5
<PAGE>
Fees table
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 (load) imposed on
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
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Management fee 0.65% 0.65% 0.65% 0.65% 0.65%
Distribution and service (12b-1) fee 0.25% 0.75% 0.70% 0.70% None
Other expenses
----- ----- ----- ----- -----
Total annual fund operating expenses
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same
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) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class O (redemption at end of period) $ $ $ $
Class O (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
</TABLE>
Balanced Fund
6
<PAGE>
More on the fund's investments
Derivative contracts The fund may, but need not, use derivative contracts, such
as options on securities, interest rate futures and options on interest rate
futures:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities, because of changes in interest rates or exchange rates;
or
.As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's, securities market or interest rate exposure. Therefore,
using derivatives can disproportionately increase losses and reduce opportuni-
ties for gains when interest rates, exchange rates or securities markets 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 pres-
ent 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. The fund may invest up to 10% of its assets in options for
hedging purposes.
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.
Smith Barney Mutual Funds
7
<PAGE>
Management
Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The manager and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range
of financial services--asset management, banking and consumer finance, credit
and charge cards, insurance, investments, investment banking and trading--and
use diverse channels to make them available to consumer and corporate customers
around the world.
Chad Graves is responsible for the day-to-day management of the equity portion
of the fund's portfolio, and James Conroy and John Bianchi are responsible for
the day-to-day management of the fixed income portion. Messrs. Graves, Conroy
and Bianchi are investment officers of the manager and vice presidents of Salo-
mon Smith Barney.
Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.45% of the fund's average daily net
assets. In addition, the manager 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, 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
that the efforts of the fund, which are limited to requesting and receiving
reports from its service providers, or the efforts or its service providers to
correct the problem will be successful.
Balanced Fund
8
<PAGE>
Choosing a class of shares to buy
You can choose among four classes of shares: Classes A, B, L and Y. In addi-
tion, you can buy additional Class O shares if you are a Class O shareholder.
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 Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
IRA, 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 $ 50 n/a $50
</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
Smith Barney Mutual Funds
9
<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 ini-
sales tial sales for pur- tial or
charge sales charge chase deferred
.You may charge is lower only by sales
qualify .Deferred than former charge
for sales Class A Class C .Must
reduction charge .Deferred share- invest
or waiver declines sales holders at
of ini- over charge .Deferred least
tial time for only sales $15
sales .Converts 1 year charge million
charge to Class .Does for only .Lower
.Lower A after not con- 1 year annual
annual 8 years vert to .Does not expenses
expenses .Higher Class A convert than
than annual .Higher to Class the
Class B expenses annual A other
and Class than expenses .Higher classes
L Class A than annual
Class A expenses
than
Class A
- -------------------------------------------------------------------------
Initial sales charge Up to None 1.00% 1.00% None
5.00%;
reduced
for large
purchases
and waived
for cer-
tain
investors.
No charge
for pur-
chases of
$500,000
or more
- -------------------------------------------------------------------------
</TABLE>
Balanced Fund
10
<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 1% if 1% if None
purchases 5.00% you you
of charged redeem redeem
$500,000 when you within 1 within 1
or more redeem year of year of
if you shares. purchase purchase
redeem The
within 1 charge
year of is
purchase reduced
over
time and
there is
no
deferred
sales
charge
after 6
years
- -----------------------------------------------------------------------
Annual distribution 0.25% of 0.75% of 0.70% of 0.70% of None
and 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.
Smith Barney Mutual Funds
11
<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- -0-
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege - lets you combine the current value of Class A shares
owned
.by you, or
.by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. 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,
Balanced Fund
12
<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:
Shares issued: On reinvestment of Upon exchange from
At initial dividends and another Smith Barney
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
(excluding shares
issued as a
dividend)
</TABLE>
Smith Barney Mutual Funds
13
<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.
Balanced Fund
14
<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 about additional waivers of deferred sales charges, con-
tact 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
dealer
representative
If you do not provide the following information, your order
will be rejected
.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 are clients of the selling group are eligible to buy shares
transfer directly from the fund.
agent
.Write the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Balanced Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
.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.
- --------------------------------------------------------------------------------
Smith Barney Mutual Funds
15
<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 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.
- --------------------------------------------------------------------------------
Balanced Fund
16
<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.
Smith Barney Mutual Funds
17
<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
Smith Barney Balanced Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
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
Balanced Fund
18
<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 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 docu-
ments.
- --------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans ($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.
Smith Barney Mutual Funds
19
<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
.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
Balanced Fund
20
<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 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.
Smith Barney Mutual Funds
21
<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 that 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 Class O
shares are eligible to exchange into Class A shares not later than 8 years
after the plan joined the program. They are eligible for exchange sooner:
If the account was opened on or after June 21, 1996 and an aggregate of $1
million is invested in Smith Barney Funds Class L and O shares (other than
money market funds), all Class L and O shares are eligible for exchange
after the plan is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the aggre-
gate 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 on
each December 31 and the exchange will occur no later than March 31 of the
following year.
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
Balanced Fund
22
<PAGE>
Dividends, distributions and taxes
Dividends The fund generally pays dividends, if any, quarterly, and makes capi-
tal gain distributions, if any, once a year, typically in December. The fund
may pay additional distributions and dividends at other times if necessary for
the fund to avoid a federal tax. Capital gain distributions and dividends are
reinvested in additional fund shares of the same class you hold. The fund
expects distributions to be from both income and gains. You do not pay a sales
charge on reinvested distributions 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 distribu-
tion 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 distri-
bution 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>
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.
Smith Barney Mutual Funds
23
<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. When reliable market prices or quotations are not readily available, the
fund may price those securities at fair value. Fair value is determined in
accordance with procedures approved by the fund's board. A fund that uses fair
value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities.
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 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.
Balanced Fund
24
<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, is
included in the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ $15.53 $14.51 $14.03 $13.28
- -----------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.70 0.80 0.83 0.85
Net realized and
unrealized gain/(loss) 1.80 1.36 0.47 0.82
- -----------------------------------------------------------------
Total income from
operations 2.50 2.16 1.30 1.67
- -----------------------------------------------------------------
Less distributions from:
Net investment income (0.68) (0.82) (0.82) (0.82)
Net realized gains (0.83) (0.32) -- (0.08)
Capital -- -- -- (0.02)
- -----------------------------------------------------------------
Total distributions (1.51) (1.14) (0.82) (0.92)
- -----------------------------------------------------------------
Net asset value, end of
year $16.52 $15.53 $14.51 $14.03
- -----------------------------------------------------------------
Total return 16.70% 15.48% 9.21% 13.24%
- -----------------------------------------------------------------
Net assets, end of year
(000)'s $ 279 $ 248 $ 266 $ 169
- -----------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.05% 1.06% 1.04% 1.07%
Net investment income 4.29 5.29 5.55 6.36
- -----------------------------------------------------------------
Portfolio turnover rate 110% 45% 58% 36%
- -----------------------------------------------------------------
</TABLE>
Smith Barney Mutual Funds
25
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998 1997(/1/) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $15.52 $14.51 $14.02 $13.28
- -----------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.62 0.73 0.77 0.78
Net realized and unrealized
gain/(loss) 1.80 1.35 0.47 0.82
- -----------------------------------------------------------------------------
Total income from operations 2.42 2.08 1.24 1.60
- -----------------------------------------------------------------------------
Less distributions from:
Net investment income (0.62) (0.75) (0.75) (0.76)
Net realized gain (0.83) (0.32) -- (0.08)
Capital -- -- -- (0.02)
- -----------------------------------------------------------------------------
Total distributions (1.45) (1.07) (0.75) (0.86)
- -----------------------------------------------------------------------------
Net asset value, end of year $16.49 $15.52 $14.51 $14.02
- -----------------------------------------------------------------------------
Total return 16.17% 14.88% 8.78% 12.62%
- -----------------------------------------------------------------------------
Net assets, end of year (000)'s $ 740 $ 951 $1,310 $1,573
- -----------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.52% 1.52% 1.55% 1.56%
Net investment income 3.87 4.85 5.13 5.82
- -----------------------------------------------------------------------------
Portfolio turnover rate 110% 45% 58% 36%
- -----------------------------------------------------------------------------
</TABLE>
Balanced Fund
26
<PAGE>
For a Class L share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998/(1)/
- -----------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of year $ $ 7.14
- -----------------------------------------------------------
Income (loss) from operations:
Net investment income 0.02
Net realized and unrealized gain/(loss) (0.41)
- -----------------------------------------------------------
Total income (loss) from operations (0.39)
- -----------------------------------------------------------
Less distributions from:
Net investment income --
Net realized gain (0.23)
- -----------------------------------------------------------
Total distributions (0.23)
- -----------------------------------------------------------
Net assets value, end of year $16.52
- -----------------------------------------------------------
Total return/(2)/ (2.28)%
- -----------------------------------------------------------
Net assets, end of year (000)'s $ 486
- -----------------------------------------------------------
Ratios to average net assets:
Expenses 1.74%
Net investment income 2.51
- -----------------------------------------------------------
Portfolio turnover rate 110%
- -----------------------------------------------------------
</TABLE>
/(1)/For the period June 15, 1998 (inception date) to July 31, 1998.
/(2)/Not annualized.
Smith Barney Mutual Funds
27
<PAGE>
(This page is intentionally left blank.)
<PAGE>
[SALOMON SMITH BARNEY LOGO APPEARS HERE]
Balanced Fund
An investment portfolio of Smith Barney Income Funds
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) FD00000 /99
<PAGE>
-------------------------
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
-------------------------
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------------------
November 30, 1999 CONVERTIBLE FUND
Class A, B, L, O and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
CONVERTIBLE FUND
----------------------------------------------
CONTENTS
----------------------------------------------
Investments, risks and performance .... 4
More on the fund's investments ........ 8
Management ............................ 9
Choosing a class of shares to buy ..... 10
Comparing the fund's classes .......... 11
Sales charges ......................... 12
More about deferred sales charges ..... 15
Buying shares ......................... 16
Exchanging shares ..................... 17
Redeeming shares ...................... 18
Other things to know about
share transactions .................. 20
Smith Barney 401(k) and
ExecChoice-TM- programs ............. 22
Dividends, distributions and
taxes ............................... 23
Share price ........................... 24
Financial highlights .................. 24
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.
-3-
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The fund seeks current income and capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests primarily in convertible securities. These are
securities that may be converted to common stock or other equity interests in
the issuer at a predetermined price or rate. The fund also may invest up to 35%
of its assets in "synthetic convertible securities," equity securities and debt
securities that are not convertible. Synthetic convertible securities are
created by combining non-convertible preferred stocks or debt securities with
warrants or call options. These synthetic instruments are designed to perform
like convertible securities of a particular company.
The fund may invest up to 25% of its assets in foreign securities. The fund may
invest in securities rated below investment grade and unrated securities of
comparable quality.
SELECTION PROCESS In evaluating a convertible security, the subadviser analyzes
fixed income characteristics of the security, as well as equity characteristics
of the underlying security.
Equity characteristics the subadviser looks for include:
- - Companies with potential for real, sustainable growth
- - Companies with competent and accessible management
- - Favorable cash flow and cash management
- - Securities structured to reduce risk and add to return
- - Securities of companies that the manager believes could benefit from a
significant appreciation event in 12-18 months
Fixed income characteristics the subadviser looks for include:
- - Favorable financial condition and capital structure
- - Risk reduction characteristics, such as avoiding companies that are
difficult to value or that have negative cash flows
- - Favorable yield to maturity in light of risk
- -4-
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENTS, RISKS AND PERFORMANCE
- -------------------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND
Convertible securities are subject both to the stock market risk associated with
equity securities and to the credit and interest rate risks associated with
fixed income securities. As the market price of the equity security underlying a
convertible security falls, the convertible security tends to trade on the basis
of its yield and other fixed income characteristics. As the market price of such
equity security rises, the convertible security tends to trade on the basis of
its equity conversion features. Therefore, investors could lose money on their
investment in the fund, or the fund may not perform as well as other
investments, if:
- - A common stock or other security into which a security owned by the fund is
convertible falls in value
- - The stock market declines generally
- - 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
- - Interest rates increase, causing the prices of fixed income securities to
decline, thereby reducing the value of the fund's 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
- - The subadviser's judgment about interest rates or the attractiveness, value
or income potential of a particular security proves incorrect
Below investment grade bonds, 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 liquid, and may
be more difficult to value.
Investments in foreign securities involve special risks, such as risk of
political or economic instability, imposition of exchange controls or other
restrictions on investments, and losses due to currency fluctuations.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- - Are seeking to earn current income with potential for capital
appreciation
- - Are seeking limited exposure to the stock market, and understand the risks
of investing in equity securities
-5-
<PAGE>
RISK/RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[GRAPH]
TOTAL RETURN FROM CLASS B SHARES
<TABLE>
<CAPTION>
CALENDAR YEARS ENDED
DECEMBER 31
- --------------------
<S> <C>
90 -4.53
91 8.86
92 16.25
93 13.40
94 1.50
95 9.8
96 6.91
97 26.29
98
</TABLE>
This bar chart shows the performance of the fund's Class B shares for each of
the past 9 years. Class A, L and Y shares would have different performance
because of their different expenses. The performance information in the chart
does not reflect sales charges, which would reduce your return.
QUARTERLY RETURNS (PAST 10 YEARS): Highest: xx% in ___ quarter 199X; Lowest: xx%
in ___ quarter 199X. Year to date: xx% through 9/30/99
RISK/RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the
Standard & Poor's 500 Index (the "S&P 500 Index"), an unmanaged broad-based
index of widely held common stocks, and the Salomon Brothers Broad Investment
Grade Index, (the "Salomon BIG Index") an unmanaged broad-based index of
__________________. This table assumes
imposition of the maximum sales charge applicable to the class, redemption of
shares at the end of the period, and reinvestment of distributions and
dividends.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
Calendar Years Ended December 31, 1998
- -----------------------------------------------------------------------------------
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
A n/a 11/06/92
- -----------------------------------------------------------------------------------
B xx/xx/xx
- -----------------------------------------------------------------------------------
L n/a n/a 06/15/98
- -----------------------------------------------------------------------------------
O 11/07/94
- -----------------------------------------------------------------------------------
Y n/a n/a 02/07/96
- -----------------------------------------------------------------------------------
S&P 500 Index * n/a
Salomon BIG Index * n/a
</TABLE>
*Index comparisons begin on _________________.
- -6-
<PAGE>
FEES TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
SHAREHOLDER FEES
(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 (load) imposed on 5.00% None 1.00% 1.00% None
purchases (as a % of offering price)
Maximum deferred sales charge (load) (as None* 5.00% 1.00% 1.00% None
a % of the lower of net asset value at
purchase or redemption)
- ---------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
- ---------------------------------------------------------------------------------------
Management fee 0.70% 0.70% 0.70% 0.70% 0.70%
- ---------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 0.75% 0.70% 0.70% None
- ---------------------------------------------------------------------------------------
Other expenses
---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------
Total annual fund operating expenses
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
EXAMPLE
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
- - You invest $10,000 in the fund for the period shown
- - Your investment has a 5% return each year
- - You reinvest all distributions and dividends without a sales charge
- - The fund's operating expenses remain the same
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (WITH OR WITHOUT REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class B (REDEMPTION AT END OF PERIOD) $ $ $ $
- --------------------------------------------------------------------------------
Class B (NO REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class L (REDEMPTION AT END OF PERIOD) $ $ $ $
- --------------------------------------------------------------------------------
Class L (NO REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class O (REDEMPTION AT END OF PERIOD) $ $ $ $
- --------------------------------------------------------------------------------
Class O (NO REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class Y (WITH OR WITHOUT REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUND'S INVESTMENTS
- --------------------------------------------------------------------------------
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:
- - To hedge against the economic impact of adverse changes in the market value
of portfolio securities, because of changes in interest rates; or
- - As a substitute for buying or selling securities
- - To enhance the fund's 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 indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities
markets 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. The fund may invest up to 10% of its assets in
options for hedging purposes.
SHORT SALES The fund may engage in short sales "against the box," by borrowing
and selling shares of common stock that the fund simultaneously holds in its
portfolio or has a right to hold through conversion of another portfolio
security.
DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
- -8-
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager oversees the
selection of the fund's investments and its general operations. The manager and
Salomon Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses
produce a broad range of financial services -- asset management, banking and
consumer finance, credit and charge cards, insurance, investments, investment
banking and trading -- and use diverse channels to make them available to
consumer and corporate customers around the world. Salomon Brothers Asset
Management an affiliate of SSB Citi Fund Management LLC located at 7 World Trade
Center, New York, New York 10048, serves as subadviser to the fund. The
subadviser manages the fund's investment portfolio, subject to the supervision
of the manager. The subadviser provides investment management and advisory
services to mutual funds and currently manages over $27.6 billion.
Daniel Berkery and Ross Margolies serve as co-portfolio managers and are
responsible for fund's the day-to-day management. Mr. Berkery, a director of the
subadviser and portfolio manager, is responsible for U.S. convertible
securities. Mr. Berkery has over 8 years of investment experience. Mr.
Margolies, a managing director of the subadviser and senior portfolio manager is
responsible for U.S. equity, convertibles and arbitrage portfolios. Mr Margolies
has over 18 years of investment experience.
MANAGEMENT FEE For its services, the manager received an advisory fee during the
fund's last fiscal year equal to 0.50% of the fund's average daily net assets.
In addition, the manager 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
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that the efforts of the fund, which are limited to requesting and
-9-
<PAGE>
receiving reports from its service providers, or the efforts of its service
providers to correct the problem will be successful.
- -10-
<PAGE>
- --------------------------------------------------------------------------------
CHOOSING A CLASS OF SHARES TO BUY
- --------------------------------------------------------------------------------
You can choose among four classes of shares: Classes A, B, L and Y. In addition,
you can buy additional Class O shares if you are a Class O shareholder. Each
class has different sales charges and expenses, allowing you to choose the class
that best meets your needs. Which class is more beneficial to an investor
depends on the amount and intended length of the investment.
- - If you plan to invest regularly or in large amounts, buying Class A shares
may help you reduce sales charges and ongoing expenses.
- - For Class B shares, all of your purchase amount and, for Class L and Class O
shares, more of your purchase amount (compared to Class A shares) will be
immediately invested. This may help offset the higher expenses of Class B,
Class L and Class O shares, but only if the fund performs well.
- - Class L and Class O shares have a shorter deferred sales charge period than
Class B shares. However, because Class B shares convert to Class A shares,
and Class L and Class O shares do not, Class B shares may be more attractive
to long-term investors.
You may buy shares from:
- - A Salomon Smith Barney Financial Consultant
- - An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
- - The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
INVESTMENT MINIMUMS Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
INITIAL ADDITIONAL
----------------------------- -----------
CLASSES A, B, L CLASS Y ALL CLASSES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
General $1,000 $15 million $50
- ------------------------------------------------------------------------------------------
Individual Retirement Accounts, Self Employed $250 $15 million $50
Retirement Plans, Uniform Gift to Minor
Accounts
- ------------------------------------------------------------------------------------------
Qualified Retirement Plans $25 $15 million $25
- ------------------------------------------------------------------------------------------
Simple IRAs $1 n/a $1
- ------------------------------------------------------------------------------------------
Monthly Systematic Investment Plans $25 n/a $25
- ------------------------------------------------------------------------------------------
Quarterly Systematic Investment Plans $50 n/a $50
- ------------------------------------------------------------------------------------------
</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
-11-
<PAGE>
COMPARING THE FUND'S CLASSES
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<S><C>
- ---------------------------------------------------------------------------------------
CLASS A CLASS B CLASS L CLASS O CLASS Y
KEY FEATURES -Initial - No - Initial - Available - No
sales charge initial sales charge for purchase initial or
-You may sales charge is lower than only by deferred
qualify for - Deferred Class A former Class sales
reduction or sales - Deferred C shareholders charge
waiver of charge sales charge - Deferred - Must
initial declines for only 1 sales charge invest at
sales charge over time year for only 1 least $15
- Lower - Converts - Does not year million
annual to Class A convert to - Does not - Lower
expenses after 8 Class A convert to annual
than Class B years - Higher Class A expenses
and Class L - Higher annual - Higher than the
annual expenses than annual other
expenses Class A expenses than classes
than Class A Class A
- ---------------------------------------------------------------------------------------
INITIAL Up to 5.00%; None 1.00% 1.00% None
SALES CHARGE reduced for
large
purchases
and waived
for certain
investors.
No charge
for
purchases of
$500,000 or
more
- ---------------------------------------------------------------------------------------
DEFERRED 1% on Up to 5.00% 1% if you 1% if you None
SALES CHARGE purchases of charged redeem within redeem within
$500,000 or when you 1 year of 1 year of
more if you redeem purchase purchase
redeem shares.
within 1 The charge
year of is reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
- ---------------------------------------------------------------------------------------
ANNUAL 0.25% of 0.75% of 0.70% of 0.70% of None
DISTRIBUTION average average average daily average daily
AND SERVICE daily net daily net net assets net assets
FEES assets assets
- ---------------------------------------------------------------------------------------
EXCHANGE-ABLE Class A Class B Class L Class L Class Y
INTO* shares of shares of shares of shares of shares of
most Smith most Smith most Smith most Smith most Smith
Barney funds Barney funds Barney funds Barney Funds Barney
funds
- ---------------------------------------------------------------------------------------
</TABLE>
*ASK YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE OR
VISIT THE WEB SITE FOR THE SMITH BARNEY FUNDS AVAILABLE FOR EXCHANGE.
- -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- -0-
- --------------------------------------------------------------------------------
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
ACCUMULATION PRIVILEGE - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
-13-
<PAGE>
LETTER OF INTENT - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge, if any, as if
all shares had been purchased at once. You may include purchases on which you
paid a sales charge within 90 days before you sign the letter.
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- - Employees of members of the NASD
- - 403(b) or 401(k) retirement plans, if certain conditions are met
- - Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- - Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
IF YOU WANT TO LEARN 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").
- -14-
<PAGE>
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
6th through
Year after purchase 1st 2nd 3rd 4th 5th 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>
<S><C>
----------------------------------------------------------------------------------
SHARES ISSUED: SHARES ISSUED: SHARES ISSUED:
AT INITIAL ON REINVESTMENT OF UPON EXCHANGE FROM
PURCHASE DIVIDENDS AND ANOTHER SMITH BARNEY
DISTRIBUTIONS FUND
----------------------------------------------------------------------------------
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total have converted into Class A
Class B shares you own shares
(excluding shares issued
as a dividend)
----------------------------------------------------------------------------------
</TABLE>
CLASS L AND CLASS 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 the fund on June 12,
1998, you will not pay an initial sales charge on Class L shares you 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.
- -15-
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT DEFERRED SALES CHARGES
- --------------------------------------------------------------------------------
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
- - Shares exchanged for shares of another Smith Barney fund
- - Shares representing reinvested distributions and dividends
- - Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
DEFERRED SALES CHARGE WAIVERS
The deferred sales charge for each share class will generally be waived:
- - On payments made through certain systematic withdrawal plans
- - On certain distributions from a retirement plan
- - For involuntary redemptions of small account balances
- - For 12 months following the death or disability of a shareholder
IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF DEFERRED SALES CHARGES, CONTACT
YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE OR
CONSULT THE SAI.
- -16-
<PAGE>
BUYING SHARES
THROUGH A SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE
You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to open a brokerage account and make arrangements to buy shares.
If you do not provide the following information, your order will be rejected
- 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 FUND'S TRANSFER AGENT
Qualified retirement plans and certain other investors who are clients of the
selling group are eligible to buy shares directly from the fund.
- - Write the transfer agent at the following address:
SMITH BARNEY INCOME FUNDS
SMITH BARNEY CONVERTIBLE FUND
(SPECIFY CLASS OF SHARES)
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 9699
PROVIDENCE, RHODE ISLAND 02940-9699
- - Enclose a check to pay for the shares. For initial purchases, complete and
send an account application.
- - For more information, call the transfer agent at 1-800-451-2010.
THROUGH A SYSTEMATIC INVESTMENT PLAN
You may authorize Salomon Smith Barney, your dealer representative or the
transfer agent to transfer funds automatically from a regular bank account, cash
held in a Salomon Smith Barney brokerage account or Smith Barney money market
fund to buy shares on a regular basis.
- - Amounts transferred should be at least: $25 monthly or $50 quarterly
- - If you do not have sufficient funds in your account on a transfer date,
Salomon Smith Barney, your dealer representative or the transfer agent may
charge you a fee
FOR MORE INFORMATION, CONTACT YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT,
DEALER REPRESENTATIVE OR THE TRANSFER AGENT OR CONSULT THE SAI.
- -17-
<PAGE>
- --------------------------------------------------------------------------------
EXCHANGING SHARES
- --------------------------------------------------------------------------------
SMITH BARNEY OFFERS A DISTINCTIVE FAMILY OF FUNDS TAILORED TO HELP MEET THE
VARYING NEEDS OF BOTH LARGE AND SMALL INVESTORS
You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to exchange into other Smith Barney funds. Be sure to read the
prospectus of the Smith Barney fund you are exchanging into. An exchange is a
taxable transaction.
- - 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 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.
- --------------------------------------------------------------------------------
WAIVER OF ADDITIONAL SALES CHARGES
Your shares will not be subject to an initial sales charge at the time of the
exchange.
Your deferred sales charge (if any) will continue to be measured from the date
of your original purchase. If the fund you exchange into has a higher deferred
sales charge, you will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be reduced.
- --------------------------------------------------------------------------------
BY TELEPHONE
If you do not have a brokerage account, you may be eligible to exchange shares
through the transfer agent. You must complete an authorization form to authorize
telephone transfers. If eligible, you may make telephone exchanges on any day
the New York Stock Exchange is open. Call the transfer agent at 1-800-451-2010
between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net asset value next
determined.
You can make telephone exchanges only between accounts that have identical
registrations.
- --------------------------------------------------------------------------------
BY MAIL
If you do not have a Salomon Smith Barney brokerage account, contact your dealer
representative or write to the transfer agent at the address on the opposite
page.
- -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 redemption proceeds will not be sent to you until your
original check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your redemption proceeds
will be placed in your account and not reinvested without your specific
instruction. In other cases, unless you direct otherwise, your redemption
proceeds will be paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
BY MAIL
For accounts held directly at the fund, send written requests to the transfer
agent at the following address:
Smith Barney Income Funds
Smith Barney Convertible Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
Your written request must provide the following:
- - Your account number
- - The class of shares and the dollar amount or number of shares to be redeemed
- - Signatures of each owner exactly as the account is registered
-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 telephone on
any day the New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received
after the close of regular trading on the Exchange are priced at the net asset
value next determined.
Your redemption proceeds can be sent by check to your address of record or by
wire transfer to a bank account designated on your authorization form. You 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 WITHDRAWAL PLANS
You can arrange for the automatic redemption of a portion of your shares on a
monthly or quarterly basis. To qualify you must own shares of the fund with a
value of at least $10,000 ($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.
- -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 redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
SIGNATURE GUARANTEES To be in good order, your redemption request must include a
signature guarantee if you:
- - Are redeeming over $10,000 of shares
- - Are sending signed share certificates or stock powers to the transfer agent
- - Instruct the transfer agent to mail the check to an address different from the
one on your account
- - Changed your account registration
- - Want the check paid to someone other than the account owner(s)
- - Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
-21-
<PAGE>
The fund has the right to:
- - Suspend the offering of shares
- - Waive or change minimum and additional investment amounts
- - Reject any purchase or exchange order
- - Change, revoke or suspend the exchange privilege
- - Suspend telephone transactions
- - Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
- - Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
SHARE CERTIFICATES The fund does not issue share certificates unless a written
request 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.
- -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 that 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 Class O shares are
eligible to exchange into Class A shares not later than 8 years after the plan
joined the program. They are eligible for exchange sooner:
If the account was opened on or after June 21, 1996 and an aggregate of
$1 million is invested in Smith Barney Funds Class L and O shares (other
than money market funds), all Class L and O shares are eligible for
exchange after the plan is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the
aggregate 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 on each December 31 and the exchange will occur no later than
March 31 of the following year.
FOR MORE INFORMATION, CALL YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR
THE TRANSFER AGENT, OR CONSULT THE SAI.
-23-
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS The fund generally pays dividends, if any, monthly, and makes capital
gain distributions, if any, once a year, typically in December. The fund may
pay additional distributions and dividends at other times if necessary for the
fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be from both income and gain. You do not pay a sales charge on
reinvested distributions 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
distributions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
<S><C>
- -----------------------------------------------------------------------------------------
TRANSACTION FEDERAL TAX STATUS
- -----------------------------------------------------------------------------------------
Redemption or exchange of shares Usually capital gain or loss; long-term only
if shares owned more than one year
- -----------------------------------------------------------------------------------------
Long-term capital gain distributions Long-term capital gain
- -----------------------------------------------------------------------------------------
Short-term capital gain distributions Ordinary income
- -----------------------------------------------------------------------------------------
Dividends Ordinary income
- -----------------------------------------------------------------------------------------
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a capital gain distribution or a
dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
- -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
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. When reliable market prices or quotations are not readily available,
or when the value of a security has been materially affected by events occurring
after a foreign exchange closes, the fund may price those securities at fair
value. Fair value is determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price securities may value those
securities higher or lower than another fund using market quotations to price
the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).
-25-
<PAGE>
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1999 1998 1997 1996(1) 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $18.61 $15.66 $15.27 $14.56
- ----------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.73 0.78 0.74 0.74
Net realized and unrealized (0.39) 3.28 0.38 0.70
gain/(loss)
- ----------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.34 4.06 1.12 1.44
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.79) (0.75) (0.73) (0.73)
Net realized gain (1.26) (0.36) -- --
- ----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.05) (1.11) (0.73) (0.73)
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.90 $18.61 $15.66 $15.27
- ----------------------------------------------------------------------------------------
TOTAL RETURN 1.97% 26.94% 7.41% 10.35%
- ----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $35,780 $38,803 $34,888 $35,238
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.25% 1.27% 1.40% 1.40%
Net investment income 4.09 4.61 4.68 5.13
- ----------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 57% 59% 48%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE SHARES METHOD.
- -26-
<PAGE>
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998 1997 1996(1) 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $18.60 $15.66 $15.27 $14.56
- --------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.64 0.69 0.66 0.67
Net realized and unrealized
gain/(loss) (0.38) 3.28 0.39 0.70
- --------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.26 3.97 1.05 1.37
- --------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.71) (0.67) (0.66) (0.66)
Net realized gain (1.26) (0.36) _ _
- --------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.97) (1.03) (0.66) (0.66)
- --------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.89 $18.60 $15.66 $15.27
- --------------------------------------------------------------------------------------
TOTAL RETURN 1.51% 26.29% 6.91% 9.80%
- --------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $35,570 $42,927 $42,420 $45,524
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.74% 1.77% 1.90% 1.90%
Net investment income 3.60 4.12 4.18 4.63
- --------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 57% 59% 48%
- --------------------------------------------------------------------------------------
</TABLE>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE SHARES METHOD.
- -27-
<PAGE>
FOR CLASS L SHARES OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1999 1998(1)
- -------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $17.14
- -------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.05
Net realized and unrealized gain/(loss) (0.17)
- -------------------------------------------------------------------------------------
TOTAL LOSS FROM OPERATIONS (0.12)
- -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.12)
Net realized gain _
- -------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.12)
- -------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.90
- -------------------------------------------------------------------------------------
TOTAL RETURN (0.74)(2)
- -------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $210
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.98%(3)
Net investment income 2.51(3)
- -------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49%
- -------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM JUNE 15, 1998 (INCEPTION DATE) TO JULY 31, 1998.
(2) NO ANNUALIZED.
(3) ANNUALIZED.
- -28-
<PAGE>
FOR A CLASS O SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998(1) 1997 1996(2) 1995(3)(4)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $18.58 $15.64 $15.27 $14.09
- ---------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.63 0.67 0.67 0.50
Net realized and unrealized
gain/(loss) (0.37) 3.31 0.37 1.17
- ---------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.26 3.98 1.04 1.67
- ---------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.71) (0.68) (0.67) (0.49)
Net realized gain (1.26) (0.36) -- --
- ---------------------------------------------------------------------------------------
Total distributions (1.97) (1.04) (0.67) (0.49)
- ---------------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR $16.87 $18.58 $15.64 $15.27
- ---------------------------------------------------------------------------------------
TOTAL RETURN 1.53% 26.37% 6.82% 12.17%(5)
- ---------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $1,557 $1,252 $641 $83
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.70% 1.74% 1.86% 1.87%(6)
Net investment income 3.63 4.14 4.17 4.77(6)
- ---------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 57% 59% 48%
- ---------------------------------------------------------------------------------------
</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) On November 7, 1994, the former Class D shares were renamed Class C shares.
(4) For the period from November 7, 1994 (inception date) to July 31, 1995.
(5) Not annualized.
(6) Annualized.
-29-
<PAGE>
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1999 1998 1997 1996(1)(2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $18.66 $15.68 $16.15
- ----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.77 0.83 0.38
Net realized and unrealized
gain/(loss) (0.35) 3.31 (0.46)
- ----------------------------------------------------------------------------------
Total income (loss) from operations 0.42 4.14 (0.08)
- ----------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.80) (0.39)
Capital (1.26) (0.36) --
- ----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.10) (1.16) (0.39)
- ----------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR $16.98 $18.66 $15.68
- ----------------------------------------------------------------------------------
TOTAL RETURN 2.42% 27.44% (0.56)%(3)
- ----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $72,870 $29,080 $9,189
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.83% 0.85% 1.00%(4)
Net investment income (loss) 4.49 5.04 4.98(4)
- ----------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 57% 59%
- ----------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from February 7, 1996 (inception date) to July 31, 1996.
(3) Not annualized.
(4) Annualized.
- -30-
<PAGE>
-31-
<PAGE>
SALOMON SMITH BARNEY-SM-
A MEMBER OF CITIGROUP [SYMBOL]
CONVERTIBLE FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE Our web site is located at www.smithbarney.com
You can also review 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
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
- -SM- Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
[FD00000 __/99]
- -------------------------
Smith Barney Mutual Funds
- -------------------------
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------------------
November 30, 1999 Diversified Strategic Income Fund
Class A, B, L, and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Diversified Strategic Income Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 9
</TABLE>
<TABLE>
<S> <C>
Management.................................................................. 10
Choosing a class of shares to buy........................................... 12
Comparing the fund's classes................................................ 13
Sales charges............................................................... 14
More about deferred sales charges........................................... 16
Buying shares............................................................... 17
Exchanging shares........................................................... 18
Redeeming shares............................................................ 20
Other things to know about
share transactions.......................................................... 22
Smith Barney 401(k) and
ExecChoice(TM) programs..................................................... 24
Dividends, distributions and taxes.......................................... 25
Share price................................................................. 26
Financial highlights........................................................ 27
</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>
Investments, Risks and Performance
Investment objective
The fund seeks high current income.
Principal investment strategies
Key investments The fund invests primarily in three types of fixed income secu-
rities:
.U.S. government securities and U.S. government mortgage-related securities
.foreign government securities, including securities issued by supranational
organizations
.U.S. and foreign corporate debt securities
Allocation: The manager allocates and reallocates the fund's assets from time
to time among the types of fixed income securities described above based on its
analysis of economic and market conditions and the relative returns and risks
then represented by each type. The manager normally expects to maintain approx-
imately 50% of the fund's assets in government and mortgage-related securities,
25% in foreign government securities and 25% in corporate debt. However, these
percentages may vary significantly over time.
Maturity: The fund will invest primarily in intermediate-term securities. As a
result, the weighted average effective maturity of the fund's portfolio is nor-
mally expected to be between four and 10 years.
Credit quality: Up to 35% of the fund's assets may be invested in U.S. or for-
eign securities rated below investment grade or comparable unrated securities.
The portion of the fund's portfolio invested in corporate debt securities will
be primarily invested in below investment grade securities.
Selection process
Government and mortgage-related securities
In selecting government and mortgage-related securities, the manager focuses on
identifying undervalued sectors and securities. Specifically, the manager:
.Emphasizes those sectors and maturities that seem to be most undervalued or
appropriate based on the manager's economic and interest rate outlook
Diversified Strategic Income Fund
2
<PAGE>
.Monitors the yield spreads between U.S. Treasury and government agency or
instrumentality securities and purchases agency and instrumentality securi-
ties when their additional yield justifies their additional risk
.Uses research to uncover inefficient sectors of the government and mortgage
markets and adjusts portfolio positions to take advantage of new information
.Measures the potential impact of supply/demand imbalances, changes in the rel-
ative yields for securities with different maturities, and changing prepay-
ment patterns to identify individual securities that balance potential return
and risk
Foreign government securities
In selecting foreign government securities, the subadviser considers and com-
pares the relative yields of various foreign government obligations. The
subadviser diversifies this portion of the portfolio by spreading assets among
countries and regions. The subadviser also may attempt to preserve the U.S.
dollar value of securities by using currency derivatives to hedge foreign cur-
rency exposure. The subadviser looks for:
.Political and economic stability, and favorable inflation and government defi-
cit prospects
.Favorable yield and maturity
.Strong financial condition and high credit quality
.Low sensitivity to interest rate changes
Corporate debt securities
In selecting corporate debt securities, the manager considers and compares the
relative yields of various types of obligations and employs a forward looking
strategy seeking to identify companies that exhibit favorable earnings pros-
pects or demonstrate a potential for higher ratings over time. The manager
looks for:
."Fallen angels" or companies that are repositioning in the marketplace and
that the manager believes are temporarily undervalued
.Younger companies with smaller capitalizations that have exhibited improving
financial strength or improving credit ratings over time
The manager also employs an active sell strategy to dispose of securities that
have a rising risk of default due to material changes in management, opera-
tions, earnings, or other internal or external factors.
Smith Barney Mutual Funds
3
<PAGE>
Investments, Risks and Performance
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:
.Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
.As interest rates decline, the issuers of securities held by the fund may pay
principal earlier than scheduled or exercise a right to call the securities,
forcing the fund to reinvest in lower yielding securities. This is known as
prepayment or call risk
.As interest rates increase, slower than expected principal payments may extend
the average life of fixed income securities held by the fund, locking in
below market interest rates and reducing the value of these securities. This
is known as extension risk
.The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds, as described below
.Adverse governmental action or, political, economic or market instability
affects a foreign country or region
.An unhedged currency in which a security is priced declines in value relative
to the U.S. dollar
.The manager's or subadviser's judgment about the attractiveness, relative
yield, value or potential appreciation of a particular security, or the
proper allocation among types of investments, proves to be incorrect
Payments of principal and interest on mortgage pools issued by instrumentali-
ties of the U.S. government are not guaranteed by the U.S. government. Although
payments of principal and interest on mortgage pools issued by some U.S. agen-
cies are guaranteed, this guarantee does not apply to losses resulting from
declines in their market values.
Less developed foreign countries in which the fund may invest have less liquid
and more volatile markets than in the U.S. In some of these countries, there is
also less information available about issuers and markets because of less rig-
orous accounting and regulatory standards than in the U.S. Currency fluctua-
tions could erase investment gains or add to investment losses.
Below investment grade bonds, which are commonly known as "junk bonds," are
speculative and their issuers may have diminished capacity to
Diversified Strategic Income Fund
4
<PAGE>
pay principal and interest. These securities have a higher risk of default,
tend to be less liquid, and may be more difficult to value. Changes in economic
conditions or other circumstances are likely to weaken the capacity of issuers
of these securities to make principal and interest payments.
The fund may engage in active and frequent trading to achieve its principal
investment strategies. This may lead to the realization and distribution to
shareholders of higher capital gains, which would increase their tax liability.
Transaction costs of frequent trading may also result in increased fund
expenses.
Who may want to invest The fund may be an appropriate investment if you:
.Are seeking to invest in fixed income securities for high current income
.Are willing to accept the risks of mortgage-related securities, foreign secu-
rities and below investment grade bonds
Smith Barney Mutual Funds
5
<PAGE>
Risk/return bar chart
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 CHART APPEARS HERE]
Calendar years ended December 31
- --------------------------------
91 10.42%
92 17.12%
93 7.28%
94 0.66%
95 10.00%
96 7.80%
97 10.89%
98
This bar chart shows the performance of the fund's Class B shares for each of
the past 8 years. Class A, L and Y shares would have different performance
because of their different expenses. The performance information in the chart
does not reflect sales charges, which would reduce your return.
Quarterly returns:
Highest: xx% in quarter 199X; Lowest: xx% in quarter 199X. Year to date:
xx% through 9/30/99
Diversified Strategic Income Fund
6
<PAGE>
Risk/return table
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
Lehman Brothers Aggregate Bond Index, an unmanaged broad-based index consisting
of government, corporate, mortgage-related and asset-backed fixed income secu-
rities. 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 n/a 11/06/92
B n/a 12/28/89
L n/a n/a 11/07/94
Y n/a n/a 10/10/95
Lehman Index * n/a
</TABLE>
* Index comparison begins on .
Smith Barney Mutual Funds
7
<PAGE>
Fees table
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 Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price) 4.50% None 1.00% None
Maximum deferred sales charge (load) (as a %
of the lower of net asset value at purchase or
redemption) None* 4.50% 1.00% None
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets)
<S> <C> <C> <C> <C>
Management fee 0.65% 0.65% 0.65% 0.65%
Distribution and service (12b-1) fee 0.25% 0.75% 0.70% None
Other expenses
Total annual fund operating expenses
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same
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) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
</TABLE>
Diversified Strategic Income Fund
8
<PAGE>
More on the fund's investments
Derivative contracts The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities, because of changes in interest rates or currency
exchange notes; or
.As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities mar-
kets 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.
Equity securities Although the fund invests primarily in fixed income securi-
ties, it may invest up to 20% of its assets in common stock and other equity-
related securities, including convertible securities, preferred stock, warrants
and rights. The portion of the fund's portfolio invested in corporate debt
securities normally includes non-convertible preferred stocks.
Zero coupon bonds Fixed income securities in which the fund may invest include
zero coupon bonds. These are bonds issued at a discount from face value because
no interest payments are made until maturity. Although these securities lock in
a rate of return to maturity, they may be subject to greater fluctuations in
market value than securities that pay interest periodically.
Forward roll transactions The fund may engage in forward roll transactions, in
which the fund sells a mortgage security, while simultaneously agreeing to
repurchase a similar security from the same party at a fixed price. These
transactions involve risks that the market value will decline below the repur-
chase price or that the other party will default.
Smith Barney Mutual Funds
9
<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.
Management
Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The fund's subadviser is Smith Barney
Global Capital Management, Inc., which is located at Cottons Centre, Hays Lane,
London SE1 2QT, United Kingdom. The subadviser is primarily responsible for
management of the fund's foreign component. The manager, subadviser and Salomon
Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a
broad range of financial services--asset management, banking and consumer
finance, credit and charge cards, insurance, investments, investment banking
and trading--and use diverse channels to make them available to consumer and
corporate customers around the world.
John C. Bianchi, James E. Conroy and Simon R. Hildreth are responsible for the
day-to-day management of the fund's portfolio. Messrs. Bianchi and Conroy, have
been investment officers of the manager and managing directors of Salomon Smith
Barney since the fund's inception in 1989. Mr. Hildreth has been an investment
officer of the manager and managing director of the subadviser since 1994.
Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.45% of the fund's average daily net
assets. In addition, the manager 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 and L shares. Under each plan, the fund pays distribution and serv-
ice fees. These fees are an ongoing expense and, over time, may cost you more
than other types of sales charges.
Diversified Strategic Income Fund
10
<PAGE>
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
that 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
11
<PAGE>
Choosing a class of shares to buy
You can choose among four classes of shares: Classes A, B, L 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 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 and Class L
shares, but only if the fund performs well.
.Class L 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 shares do not, Class B shares may be more attractive to long-term invest-
ors.
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 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 $50 n/a $50
</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
Diversified Strategic Income Fund
12
<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 Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
- ------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
4.50%;
reduced for
large pur-
chases and
waived for
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
- ------------------------------------------------------------------------
Deferred sales charge 1% on pur- Up to 4.50% 1% if you None
chases of charged redeem
$500,000 or when you within 1
more if you redeem year of
redeem shares. The purchase
within 1 charge 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 0.70% of None
service fees average average average
daily net daily net daily net
assets assets assets
- ------------------------------------------------------------------------
Exchangeable into* Class A Class B Class L Class Y
shares shares shares shares
of most of most of most of most
Smith Bar- Smith Bar- Smith Bar- Smith Bar-
ney funds ney funds ney funds ney 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.
Smith Barney Mutual Funds
13
<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 4.50 4.71
$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 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
.Accumulation privilege - lets you combine the current value of Class A shares
owned
.by you, or
.by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. 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, if
any, as if all shares had been purchased at once. You may
Diversified Strategic Income Fund
14
<PAGE>
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 4.50% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial purchase On reinvestment of Upon exchange from
dividends and another Smith Barney
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
(excluding shares
issued as a
dividend)
</TABLE>
Smith Barney Mutual Funds
15
<PAGE>
Class L shares
You buy Class L 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 shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998,
you will not pay an initial sales charge on Class L 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.
Diversified Strategic Income Fund
16
<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 about additional waivers of deferred sales charges, con-
tact 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
dealer
representative
If you do not provide the following information, your order
will be rejected
.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 are clients of the selling group are eligible to buy shares
transfer directly from the fund.
agent
.Write the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Diversified Strategic Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
.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.
Smith Barney Mutual Funds
17
<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. 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 Con-
sultant, 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.
Diversified Strategic Income Fund
18
<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.
Smith Barney Mutual Funds
19
<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
Smith Barney Diversified Strategic Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
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
Diversified Strategic Income Fund
20
<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 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 docu-
ments.
- --------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans ($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.
Smith Barney Mutual Funds
21
<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
.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
Diversified Strategic Income Fund
22
<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.
Smith Barney Mutual Funds
23
<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 and Class L shares
to participating plans as investment alternatives under the programs. You can
meet minimum investment and exchange amounts by combining the plan's invest-
ments 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 that 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
L shares are eligible to exchange into Class A shares not later than 8 years
after the plan joined the program. They are eligible for exchange sooner:
If the account was opened on or after June 21, 1996 and an aggregate of $1
million is invested in Smith Barney Funds Class L shares (other than money
market funds), all Class L shares are eligible for exchange after the plan
is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the aggregate
is invested in Smith Barney Funds Class L shares (other than money market
funds), all Class L shares are eligible for exchange on each December 31 and
the exchange will occur no later than March 31 of the following year.
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
Diversified Strategic Income Fund
24
<PAGE>
Dividends, distributions and taxes
Dividends The fund generally pays dividends monthly and makes capital gain dis-
tributions, if any, once a year, typically in December. The fund may pay addi-
tional distributions and dividends at other times if necessary for the fund to
avoid a federal tax. Capital gain distributions and dividends are reinvested in
additional fund shares of the same class you hold. The fund expects distribu-
tions to be primarily from income. You do not pay a sales charge on reinvested
distributions 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>
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.
Smith Barney Mutual Funds
25
<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. When reliable market prices or quotations are not readily available, or
when the value of a security has been materially affected by events occurring
after a foreign exchange closes, the fund may price those securities at fair
value. Fair value is determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price securities may value those
securities higher or lower than another fund using 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 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.
Diversified Strategic Income Fund
26
<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, is
included in the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998/(1)/ 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $ 8.01 $ 7.82 $ 7.85 $ 7.76
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income/(2)/ 0.53 0.62 0.61 0.94
Net realized and unrealized
gain/(loss) 0.05 0.24 0.03 (0.18)
- ------------------------------------------------------------------------------
Total income from operations 0.58 0.86 0.64 0.76
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.58) (0.67) (0.62) (0.48)
Net realized gain (0.05) -- -- --
Capital -- -- (0.05) (0.19)
- ------------------------------------------------------------------------------
Total distributions (0.63) (0.67) (0.67) (0.67)
- ------------------------------------------------------------------------------
Net asset value, end of year $ 7.96 $ 8.01 $ 7.82 $ 7.85
- ------------------------------------------------------------------------------
Total return 7.47% 11.36% 8.39% 10.35%
- ------------------------------------------------------------------------------
Net assets, end of year (000)'s $397,127 $ 267 $ 203 $ 177
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 1.01% 1.03% 1.04% 1.09%
Net investment income 6.51 7.75 7.85 8.15
- ------------------------------------------------------------------------------
Portfolio turnover rate 128% 85% 90% 83%
- ------------------------------------------------------------------------------
</TABLE>
/(1)/Per share amounts calculated using the monthly average shares method.
/(2)/The manager waived part of its fees for the year ended July 31, 1995. If
such fees had not been waived, the per share effect on net investment
income and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Decrease Expenses Ratio
to Net Investment Income Without Fee Waiver
1995 1995
- ----------------------------------------------------
<S> <C> <C>
Class A $0.01 1.14%
- ----------------------------------------------------
</TABLE>
Smith Barney Mutual Funds
27
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998/(1)/ 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $ 8.03 $ 7.83 $ 7.86 $ 7.76
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income/(2)/ 0.49 0.59 0.58 0.70
Net realized and unrealized
gain/(loss) 0.05 0.23 0.01 0.02
- ------------------------------------------------------------------------------
Total income from operations 0.54 0.82 0.59 0.72
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.54) (0.62) (0.57) (0.44)
Net realized gain (0.05) -- -- --
Capital -- -- (0.05) (0.18)
- ------------------------------------------------------------------------------
Total distributions (0.59) (0.62) (0.62) (0.62)
- ------------------------------------------------------------------------------
Net asset value, end of year $ 7.98 $ 8.03 $ 7.83 $ 7.86
- ------------------------------------------------------------------------------
Total return 6.93% 10.89% 7.80% 10.00%
- ------------------------------------------------------------------------------
Net assets, end of year (000)'s $2,280 $2,440 $2,380 $2,367
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses/(2)/ 1.50% 1.51% 1.52% 1.56%
Net investment income 6.12 7.34 7.36 6.82
- ------------------------------------------------------------------------------
Portfolio turnover rate 128% 85% 90% 83%
- ------------------------------------------------------------------------------
</TABLE>
/(1)/Per share amounts calculated using the monthly average shares method.
/(2)/The manager has waived part of its fees for the year ended July 31, 1995.
If such fees had not been waived, the per share effect on net investment
income and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Decrease Expenses Ratio
to Net Investment Income Without Fee Waiver
1995 1995
- ----------------------------------------------------
<S> <C> <C>
Class B $0.00/(3)/ 1.51%
- ----------------------------------------------------
</TABLE>
/(3)/Amount represents less than $0.01 per share.
Diversified Strategic Income Fund
28
<PAGE>
(This page is intentionally left blank.)
<PAGE>
[SALOMON SMITH BARNEY LOGO APPEARS HERE]
Diversified
Strategic Income Fund
An investment portfolio of Smith Barney Income Funds
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)
FD00000 /99
Smith Barney Mutual Funds
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------------------
November 30, 1999 Exchange Reserve Fund
Class B and L Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Exchange Reserve Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
</TABLE>
<TABLE>
<S> <C>
Comparing the fund's classes................................................ 9
Sales charges............................................................... 10
More about deferred sales charges........................................... 11
Buying shares............................................................... 12
Exchanging shares........................................................... 13
Redeeming shares............................................................ 15
Other things to know about share transactions............................... 17
Smith Barney 401(k) and ExecChoice(TM) programs............................. 19
Dividends, distributions and taxes.......................................... 20
Share price................................................................. 21
Financial highlights........................................................ 22
</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. There is no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.
Smith Barney Mutual Funds
1
<PAGE>
Investments, Risks and Performance
Investment objective
The fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity.
Principal investment strategies
Key investments The fund invests in high quality, U.S. dollar denominated short
term debt securities. These may include obligations issued by U.S. and foreign
banks, the U.S. government, its agencies or instrumentalities, U.S. states and
municipalities and U.S. and foreign corporate issuers. The fund normally will
invest at least 25% of its assets in obligations of domestic and foreign banks.
Either the principal amount of each obligation must be fully insured by the
FDIC or the issuing bank must have more than $100 million of working capital or
more than $1 billion of total assets.
The fund may invest in all types of money market securities including commer-
cial paper, certificates of deposit, time deposits, bankers' acceptances,
asset-backed securities, repurchase agreements and other short term debt secu-
rities. The fund limits foreign investments to issuers located in major indus-
trialized countries.
Minimum credit quality. The fund invests in commercial paper and short-term
obligations rated by at least one nationally recognized rating organization in
the highest short term rating category, or if unrated, of equivalent quality,
and in other corporate obligations and municipal obligations rated in the two
highest rating categories, or if unrated, of equivalent quality.
Maximum maturity. The fund invests exclusively in securities having remaining
maturities of 397 days or less. The fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.
Selection process In selecting investments for the funds, the manager looks
for:
.The best relative values based on an analysis of yield, price, interest rate
sensitivity and credit quality
.Issuers offering minimal credit risk
.Maturities consistent with the manager's outlook for interest rates
Exchange Reserve Fund
2
<PAGE>
All investments involve some degree of risk. However, the fund is a "money mar-
ket fund" and, as such, seeks income by investing in short-term debt securities
that meet strict standards established by the board of directors based on spe-
cial rules for money market funds adopted under federal law.
Principal risks of investing in the fund
Although the fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the fund, or the fund could
underperform other short term debt instruments or money market funds if:
.Interest rates rise sharply
.An issuer or guarantor of the fund's securities defaults, or has its credit
rating downgraded
.The manager's judgment about the value or credit quality of a particular secu-
rity proves to be incorrect
The fund invests at least 25% of its assets in obligations of domestic and for-
eign banks and, as a result, is more susceptible to events affecting the bank-
ing industry. The value of the fund's foreign bank securities may go down
because of unfavorable government actions or political instability. Compared to
U.S. banks, there may be less publicly available information about foreign
banks. In addition, foreign banks are not subject to uniform accounting, audit-
ing and financial reporting standards of U.S. banks. A decline in a foreign
currency relative to the U.S. dollar may indirectly increase credit risk and
default risk attributable to foreign bank obligations in which the fund
invests.
The fund may be an appropriate investment if you:
.Are seeking current income
.Are looking for an investment with lower risk than most other types of funds
.Are looking to allocate a portion of your assets to money market securities
Smith Barney Mutual Funds
3
<PAGE>
Risk/return bar chart
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 CHART APPEARS HERE]
Calendar years ended December 31
--------------------------------
89 10%
90 10%
91 10%
92 10%
93 10%
94 10%
95 10%
96 10%
97 10%
98 10%
This bar chart shows the performance of the fund's Class B shares for each of
the past 10 years. Class L shares would have different performance because of
their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
Quarterly returns:
Highest: xx% in quarter 199X; Lowest: xx% in quarter 199X.
Year to date: xx% through 9/30/99
Exchange Reserve Fund
4
<PAGE>
Risk/return table
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
90-day Treasury bill. 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>
B / /
L n/a 11/7/94
90-day T-bill n/a
</TABLE>
* Index comparison begins on .
7 day yield as of , 1999
Class B Class L
Call 1-877-795-2703 for the fund's current yield
Smith Barney Mutual Funds
5
<PAGE>
Fees table
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 B Class L
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) None(/1/) None(/1/)
Maximum deferred sales charge (load) (as a % of the
lower of net asset value at purchase or redemption) 4.50%(/2/) 1.00%(/2/)
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class B Class L
<S> <C> <C>
Management fee 0.50% 0.50%
Distribution and service (12b-1) fee 0.50% 0.50%
Other expenses
---------- ----------
Total annual fund operating expenses
</TABLE>
(/1/)Shares of the fund may be acquired by the general public only through the
exchange of Class B or Class L shares of other Smith Barney mutual funds.
Exchanges are made at net asset value, without a front-end sales charge.
Shares of the fund may, however, be acquired directly through certain
retirement programs. Class L shares of other Smith Barney mutual funds may
be subject to initial sales charges of 1.00% or less.
(/2/)Class B or Class L shares of the fund acquired through exchanges with
shares of other Smith Barney mutual funds are subject to the deferred sales
charge, if any, applicable to the exchanged shares. This could be 4.50% or
less for Class B shares and 1.00% or less for Class L shares.
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 B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
</TABLE>
Exchange Reserve Fund
6
<PAGE>
Management
Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The manager and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range
of financial services--asset management, banking and consumer finance, credit
and charge cards, insurance, investments, investment banking and trading--and
use diverse channels to make them available to consumer and corporate customers
around the world.
Phyllis M. Zahorodny, investment officer of the manager and managing director
of Salomon Smith Barney, has been responsible for the day-to-day management of
the fund's portfolio since its inception [in 1985].
Management fee For its services, the manager received a fee during the fund's
last fiscal year equal to 0.50% 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 B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, 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
that the efforts of the fund (limited to requesting and receiving reports from
its service providers) or its service providers to correct the problem will be
successful.
Smith Barney Mutual Funds
7
<PAGE>
Choosing a class of shares to buy
You can buy shares of the fund only by exchanging Class B or Class L shares of
other Smith Barney mutual funds (in limited circumstances, you also may be able
to buy shares of the fund directly through an investment in a participating
retirement plan). You should consult your Salomon Smith Barney Financial
Consultant or dealer representative for more information.
Class B and Class L shares have different sales charges and expenses. Class L
shares have a shorter deferred sales charge period than Class B shares. Howev-
er, because Class B shares convert to Class A shares of the Smith Barney Cash
Portfolio, and Class L shares do not, Class B shares may be more attractive to
long-term investors.
You may buy shares of Smith Barney mutual funds 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 nature of your investment account. Whether you are exchanging
into the fund or buying shares directly through a participating retirement
plan, you must satisfy these minimums.
<TABLE>
<CAPTION>
Initial Additional
<S> <C> <C>
General $1,000 $50
IRAs, Self Employed Retirement Plans, Uniform Gift to Minor
Accounts $250 $50
Qualified Retirement Plans $25 $25
Simple IRAs $1 $1
</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
Exchange Reserve Fund
8
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class B Class L
<S> <C> <C>
Key features .Available through .Available through
exchange only, except exchange only, except
that for certain that for participants
qualified and non- in the Smith Barney
qualified retirement 401(k) program or the
plans may make direct Smith Barney
purchases ExecChoice(TM) pro-
.No initial sales gram may make direct
charge purchase
.Deferred sales .No initial sales
charge declines over charge (but may have
time been subject to ini-
.Converts to Class A tial sales charge for
shares of Smith Bar- Class L shares of
ney Cash Portfolio fund from which you
after 8 years are exchanging)
.Deferred sales
charge for only 1
year
.Does not convert to
Class A shares of
Smith Barney Cash
Portfolio
- ------------------------------------------------------------------------------
Initial sales None None
charge
(but may have been
subject to initial
sales charge for Class
L shares of fund from
which you are exchang-
ing)
- ------------------------------------------------------------------------------
Deferred Up to 4.50% charged 1% if you redeem
sales charge when you redeem within 1 year of pur-
shares. The charge is chase
reduced over time and
there is no deferred
sales charge after 6
years
- ------------------------------------------------------------------------------
Annual distribution and service 0.50% of average daily 0.50% of average daily
fees net assets net assets
- ------------------------------------------------------------------------------
Exchangeable into* Class B shares of most Class L shares of most
Smith Barney funds Smith Barney funds
- ------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds
9
<PAGE>
Sales charges
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 4.50% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares of Smith Barney Cash Portfolio. This helps you because Class A
shares have lower annual expenses. Your Class B shares will convert to Class A
shares of Smith Barney Cash Portfolio as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith
distributions Barney 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 of Smith
(excluding shares Barney Cash Port-
issued as a divi- folio
dend)
</TABLE>
Class L shares
You buy Class L shares of the fund without paying an initial sales charge. How-
ever, if you redeem your Class L shares within one year of purchase, you will
pay a deferred sales charge of 1%. You buy Class L shares of other Smith Barney
mutual funds (from which you may exchange into the fund) at the offering price,
which is the net asset value plus a sales charge of 1% (1.01% of the net amount
invested).
Exchange Reserve Fund
10
<PAGE>
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 Salomo Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
.On payments made through certain systematic withdrawal plans
.On certain distributions from a retirement plan
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder
If you want to learn about additional waivers of deferred sales charges, con-
tact your Salomon Smith Barney Financial Consultant or dealer representative or
consult the SAI.
Smith Barney Mutual Funds
11
<PAGE>
Buying shares
Available Generally, you may buy shares of the fund only by exchanging
only by Class B or Class L shares of another Smith Barney mutual
exchanging fund, except that:
shares .Class B shares may be purchased directly by certain quali-
fied and non-qualified retirement plans
.Class L shares may be purchased directly by participants in
the Smith Barney 401(k) program or the Smith Barney
ExecChoice(TM) program
You should contact your Salomon Smith Barney Financial Con-
sultant or dealer representative to exchange into the fund
from other Smith Barney funds.
- --------------------------------------------------------------------------------
Through the Qualified retirement plans and certain other investors who
fund's are clients of the selling group are eligible to buy shares
transfer directly from the fund.
agent
.Write the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Exchange Reserve Fund
Class B or Class L (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
.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.
Exchange Reserve Fund
12
<PAGE>
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. 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 Con-
sultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange. Your deferred sales charge (if any)
sales charges will continue to be measured from the date of your original
purchase. If the fund you exchange into has a higher deferred
sales charge, you will be subject to that charge. If you
exchange at any time into a fund with a lower charge, the
sales charge will not be reduced.
Smith Barney Mutual Funds
13
<PAGE>
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.
Exchange Reserve Fund
14
<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
Smith Barney Exchange Reserve Fund
Class B or Class C (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
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
15
<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 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 docu-
ments.
- --------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans ($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.
Exchange Reserve Fund
16
<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
.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
17
<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 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.
Exchange Reserve Fund
18
<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 L shares to partici-
pating plans as investment alternatives under the programs. You can meet mini-
mum 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. All additional purchases must be of Class L shares.
.Class L shares may be purchased by plans investing less than $1 million. Class
L shares are eligible to exchange into Class A shares of the Smith Barney
Cash Portfolio not later than 8 years after the plan joined the program. They
are eligible for exchange sooner:
If the account was opened on or after June 21, 1996 and an aggregate of $1
million is invested in Smith Barney Funds Class L shares (other than money
market funds), all Class L shares are eligible for exchange after the plan
is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the aggre-
gate is invested in Smith Barney Funds Class L shares (other than money
market funds), all Class L shares are eligible for exchange on each Decem-
ber 31 and the exchange will occur no later than March 31 of the following
year.
.Class B shares of Smith Barney Mutual Funds are not available for purchase by
participating plans opened on or after June 21, 1996, but may continue to be
purchased by any participating plan in the Smith Barney 401(k) Program opened
before that date and originally investing in that class. Class B shares are
subject to a 3.00% deferred sales charge 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 partici-
pating 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 Smith Barney Cash Portfolio.
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
Smith Barney Mutual Funds
19
<PAGE>
Dividends, distributions and taxes
Dividends The fund generally declares a dividend of substantially all of its
net investment income on each day the New York Stock Exchange is open. The fund
generally makes capital gain distributions, if any, once a year, typically in
December. The fund may pay additional distributions and dividends at other
times if necessary for the fund to avoid a federal tax. Dividends and capital
gain distributions are reinvested in additional fund shares of the same class
you hold. The fund expects distributions to be primarily from income. Alterna-
tively, you can instruct your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent to have your distributions and/or divi-
dends 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 effec-
tive 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 no gain or loss;
loss may result to the
extent of any deferred
sales charge
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
The fund anticipates that it will normally not earn or distribute any long-term
capital gains.
After the end of each year, the fund will provide you with information about
the distributions and dividends you received 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 and dividends. 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.
Exchange Reserve Fund
20
<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.
The fund uses the amortized cost method to value its portfolio securities.
Using this method, the fund systematically amortizes over the remaining life of
a security the difference between the principal amount due at maturity and the
original cost of the security to the fund.
<TABLE>
<CAPTION>
FORM OF PURCHASE IS EFFECTIVE
PURCHASE PAYMENT AND DIVIDENDS BEGIN
<S> <C> <C>
-- Payment in federal If received before At the close of
funds the close of regular regular trading on
trading on the the Exchange on that
Exchange: day
-- Having a If received after the At the close of
sufficient cash close of regular regular trading on
balance in your trading on the the Exchange on the
account with Exchange: next business day
Salomon Smith
Barney or a
selling group
member
-------------------------------------------------------------------
-- Other forms of At the close of
payment, with regular trading on
conversion into, the Exchange on the
or advance of, next business day
federal funds by
Salomon Smith
Barney or a
selling group
member
-- Other forms of
payment received
by the transfer
agent
</TABLE>
Salomon Smith Barney or members of the selling group must promptly transmit all
orders to buy, exchange or redeem shares to the fund's agent.
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 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
21
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------
Net investment income 0.044 0.043 0.044 0.044
Dividends from net
investment income (0.044) (0.043) (0.044) (0.044)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------
TOTAL RETURN 4.51% 4.43% 4.53% 4.49%
- -----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 74 $ 117 $ 150 $ 160
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.21% 1.16% 1.17% 1.24%
Net investment income 4.43 4.34 4.45 4.35
- -----------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31, 1999 1998(1) 1997 1996 1995(2)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
Net investment income 0.044 0.043 0.044 0.035
Dividends from net investment income (0.044) (0.043) (0.044) (0.035)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN 4.52% 4.42% 4.51% 3.52%++
- ----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S) $ 9,315 $ 5,808 $ 9,445 $ 2,850
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.21% 1.16% 1.17% 1.21%+
Net investment income 4.43 4.34 4.39 4.76+
- ----------------------------------------------------------------------------
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the period from November 7, 1994 (inception date) to July 31, 1995.
++Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
<PAGE> 23
(This page is intentionally left blank.)
<PAGE>
[SALOMON SMITH BARNEY LOGO APPEARS HERE]
Exchange Reserve
Fund
An investment portfolio of Smith Barney Income Funds
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)
FD00000 /99
<PAGE>
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
------------------------------------------------------------------------
November 30, 1999 HIGH INCOME FUND
Class A, B, L and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
HIGH INCOME FUND
CONTENTS
Investments, risks and performance........................................4
More on the fund's investments............................................8
Management................................................................9
Choosing a class of shares to buy........................................10
Comparing the fund's classes.............................................11
Sales charges............................................................12
More about deferred sales charges........................................15
Buying shares............................................................16
Exchanging shares........................................................17
Redeeming shares.........................................................18
Other things to know about
share transactions.....................................................20
Smith Barney 401(k) and
ExecChoice(TM) programs................................................22
Dividends, distributions and
taxes..................................................................23
Share price..............................................................24
Financial highlights.....................................................24
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.
HIGH INCOME FUND -3-
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks high current income.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests primarily in high yield corporate bonds,
debentures and notes. These securities are commonly known as "junk bonds"
because they are rated in the lower rating categories of nationally and
internationally recognized rating agencies, or, if unrated, of similar credit
quality. The fund will not, however, invest more than 10% of its assets in
securities rated lower than B by both Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group.
The fund may invest in fixed income securities denominated either in U.S.
dollars or foreign currencies, and may invest up to 40% of its assets in fixed
income securities issued by foreign companies, including those in developing
countries. The fund's investments may be of any maturity, but under normal
conditions, the fund expects to maintain an average weighted maturity of between
five and 10 years. The fund may invest in zero coupon bonds, which trade at a
discount from face value becuase no interest is paid until maturity.
SELECTION PROCESS The manager attempts to minimize the risk of any individual
security by diversifying the fund's investments across a range of issues,
industries and maturity dates. In selecting high yield corporate fixed income
securities, the manager considers and compares the relative yields of various
types of obligations and employs a forward looking strategy seeking to identify
companies that exhibit favorable earnings prospects or demonstrate a potential
for higher ratings over time. The manager looks for:
- - Well-known companies with credit ratings within the upper- and
middle-rated tiers of the high-yield debt market
- - "Fallen angels" or companies that are repositioning in the marketplace
and that the manager believes are temporarily undervalued
- - Younger companies with smaller capitalizations that have exhibited
improving financial strength or improving credit ratings over time
The manager also employs an active sell strategy to dispose of securities that
have a rising risk of default due to material changes in management, operations,
earnings, or other internal or external factors.
INVESTMENTS, RISKS AND PERFORMANCE
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 issuer of a security owned by the fund defaults on its obligation to
pay principal and/or interest, or the security's credit rating is
downgraded. This risk is greater for high income bonds
- -4-
<PAGE>
than for bonds of higher credit quality
- - Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
- - Foreign investments lose their value because of an increase in market
interest rates in one or more regions, adverse governmental action or,
political, economic or market instability in a foreign country or region
- - An unhedged currency in which a security is priced declines in value
relative to the U.S. dollar
- - The manager's judgment about the attractiveness, relative yield, value or
potential appreciation of a particular security proves to be incorrect
Below investment grade fixed income 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 liquid, and may be more difficult to value. Changes in economic
conditions or other circumstances are likely to weaken the capacity of issuers
of these securities to make principal and interest payments. In addition, zero
coupon bonds may be subject to greater fluctuations in market value than
securities that pay interest periodically.
Some foreign countries in which the fund invests have less liquid and more
volatile markets than in the U.S. In some foreign countries, there is also less
information available about foreign issuers and markets because of less rigorous
accounting and regulatory standards than in the U.S. Currency fluctuations could
erase investment gains or add to investment losses. The risk of investing in
foreign securities is greater in the case of less developed countries.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- - Are seeking to invest in fixed income securities for high current income
- - Are willing to accept the credit and interest rate risks of high yield
securities
HIGH INCOME FUND -5-
<PAGE>
RISK/RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[BAR CHART]
<TABLE>
<CAPTION>
Calendar years ended December 31
-----------------------------------------------------------------------
90 91 92 93 94 95 96 97 98
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return -8.66 8.82 23.86 18.55 1.60 9.77 8.41 17.72
for Class B
Shares
</TABLE>
This bar chart shows the performance of the fund's Class B shares for each of
the past 9 years. Class A, L and Y shares would have different performance
because of their different expenses. The performance information in the chart
does not reflect sales charges, which would reduce your return.
QUARTERLY RETURNS (PAST 10 YEARS): Highest: xx% in ___ quarter 199X; Lowest: xx%
in ___ quarter 199X. Year to date: xx% through 9/30/99
RISK/RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Bear
Stearns High-Yield Index, an unmanaged broad-based index of high yield bonds
with a remaining maturity of at least seven years, but less than ten years. This
table assumes imposition of the maximum sales charge applicable to the class,
redemption of shares at the end of the period, and reinvestment of distributions
and dividends.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Calendar Years Ended December 31, 1998
Class 1 year 5 years 10 years Sincce Inception Inception Date
<S> <C> <C> <C> <C> <C>
A n/a 11/06/92
B xx/xx/xx
L n/a 08/24/94
Y n/a n/a * 04/28/95
Bear Stearns
High Yield Index * n/a
</TABLE>
*Index comparisons begin on ____________.
- -6-
<PAGE>
FEES TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as 4.50% None 1.00% None
a % of offering price)
Maximum deferred sales charge (load) (as a % of the None* 4.50% 1.00% None
lower of net asset value at purchase or redemption)
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
Management fee 0.70% 0.70% 0.70% 0.70%
Distribution and service (12b-1) fee 0.25% 0.75% 0.70% None
Other expenses
---- ---- ---- ----
Total annual fund operating expenses
==== ==== ==== ====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
EXAMPLE
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
- - You invest $10,000 in the fund for the period shown
- - Your investment has a 5% return each year
- - You reinvest all distributions and dividends without a sales charge
- - The fund's operating expenses remain the same
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without redemption) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
</TABLE>
HIGH INCOME FUND -7-
<PAGE>
MORE ON THE FUND'S INVESTMENTS
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:
- - To hedge against the economic impact of adverse changes in the market
value of portfolio securities, because of changes in interest rates; or
- - As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities
markets 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.
EQUITY SECURITIES The fund may invest up to 20% of its assets in common stock or
other equity securities. In selecting equity securities for the fund's
portfolio, the manager considers both quantitative and qualitative factors,
including potential for growth and dividend yield.
CONVERTIBLE SECURITIES The fund may invest in fixed income securities that are
convertible into shares of common stock of their issuer. These securities share
investment characteristics of both fixed income and equity securities. The value
of a convertible security tends to vary more with fluctuations in the underlying
common stock and less with fluctuations in interest rates, compared with fixed
income securities that are not convertible.
DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
- -8-
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager selects the
fund's investments and oversees its operations. The manager and Salomon Smith
Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
- -- and use diverse channels to make them available to consumer and corporate
customers around the world.
John C. Bianchi, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund since 1988.
MANAGEMENT FEE For its services, the manager received an advisory fee during the
fund's last fiscal year equal to 0.50% of the fund's average daily net assets.
In addition, the manager 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
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that 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.
HIGH INCOME FUND -9-
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among four classes of shares: Classes A, B, L 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 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
and Class L shares, but only if the fund performs well.
- - Class L 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 shares do not, Class B shares may be more attractive to long-term
investors.
You may buy shares from:
- - A Salomon Smith Barney Financial Consultant
- - An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
- - The fund, but only if you are investing through certain qualified plans
or certain dealer representatives
INVESTMENT MINIMUMS Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
----------------------------------------- ----------------
CLASSES A, B, L CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
IRAs, Self Employed Retirement Plans, Uniform $250 $15 million $50
Gift to Minor Accounts
Qualified Retirement Plans $25 $15 million $25
Simple IRAs $1 n/a $1
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans $50 n/a $50
</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
- -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 compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
KEY - Initial sales charge - No initial sales - Initial sales - No initial or
FEATURES - You may qualify charge charge is lower deferred sales charge
for reduction or - Deferred sales than Class A - Must invest at least
waiver of initial charge declines - Deferred sales $15 million
sales charge over time charge for only 1 - Lower annual
- Lower annual - Converts to year expenses than the
expenses than Class Class A after 8 - Does not other classes
B and Class L years convert to
- Higher annual Class A
expenses than - Higher annual
Class A expenses than
Class A
INITIAL SALES Up to 4.50%; None 1.00% None
CHARGE reduced for large
purchases and
waived for certain
investors. No
charge for
purchases of
$500,000 or more
DEFERRED 1% on purchases of Up to 4.50% 1% if you redeem None
SALES CHARGE $500,000 or more if charged when you within 1 year of
you redeem within redeem shares. purchase
1 year of purchase The charge is
reduced over time
and there is no
deferred sales
charge after 6 years
ANNUAL 0.25% of average 0.75% of average 0.70% of average None
DISTRIBUTION daily net assets daily net assets daily net assets
AND SERVICE
FEES
EXCHANGE- Class A shares of Class B shares of Class L shares of Class Y shares of
ABLE INTO* most Smith Barney most Smith Barney most Smith most Smith Barney
funds funds Barney 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.
HIGH INCOME FUND -11-
<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 4.50 4.71
$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 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
Letter of intent - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge, if any, as if
all shares had been purchased at once. You may include purchases on which you
paid a sales charge within 90 days before you sign the letter.
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- - Employees of members of the NASD
- - 403(b) or 401(k) retirement plans, if certain conditions are met
- -12-
<PAGE>
- - Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- - Investors who redeemed Class A shares of a Smith Barney fund in the past
60 days, if the investor's Salomon Smith Barney Financial Consultant or
dealer representative is notified
If you want to learn 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").
HIGH INCOME FUND -13-
<PAGE>
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
6th through
Year after purchase 1st 2nd 3rd 4th 5th 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.50% 4% 3% 2% 1% 0%
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
SHARES ISSUED: SHARES ISSUED: SHARES ISSUED:
AT INITIAL ON REINVESTMENT OF UPON EXCHANGE FROM
PURCHASE DIVIDENDS AND ANOTHER SMITH BARNEY
DISTRIBUTIONS FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total Class B have converted into Class A
shares you own (excluding shares
shares issued as a dividend)
</TABLE>
CLASS L SHARES
You buy Class L 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 shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998, you
will not pay an initial sales charge on Class L 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.
- -14-
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
- - Shares exchanged for shares of another Smith Barney fund
- - Shares representing reinvested distributions and dividends
- - Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
DEFERRED SALES CHARGE WAIVERS
The deferred sales charge for each share class will generally be waived:
- - On payments made through certain systematic withdrawal plans
- - On certain distributions from a retirement plan
- - For involuntary redemptions of small account balances
- - For 12 months following the death or disability of a shareholder
If you want to learn about additional waivers of deferred sales charges, contact
your Salomon Smith Barney Financial Consultant or dealer representative or
consult the SAI.
-15-
<PAGE>
BUYING SHARES
<TABLE>
<S> <C>
Through a You should contact your Salomon Smith Barney Financial Consultant
Salomon or dealer representative to open a brokerage account and make
Smith arrangements to buy shares.
Barney
Financial If you do not provide the following information, your order will be
Consultant rejected
or dealer
represen- - Class of shares being bought
tative
- 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 are
fund's clients of the selling group are eligible to buy shares directly from
transfer the fund.
agent
- Write the transfer agent at the following address:
SMITH BARNEY INCOME FUNDS
SMITH BARNEY HIGH INCOME FUND
(SPECIFY CLASS OF SHARES)
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 9699
PROVIDENCE, RHODE ISLAND 02940-9699
- Enclose a check to pay for the shares. For initial purchases,
complete and send an account application.
- For more information, call the transfer agent at
1-800-451-2010.
- --------------------------------------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your dealer
systematic representative or the transfer agent to transfer funds
investment automatically from a regular bank account, cash held in
plan a Salomon Smith Barney brokerage account or Smith Barney
money market fund to buy shares on a regular basis.
- Amounts transferred should be at least: $25 monthly
or $50 quarterly
- If you do not have sufficient funds in your account
on a transfer date, Salomon Smith Barney, your dealer
representative or the transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or consult the SAI.
</TABLE>
- -16-
<PAGE>
EXCHANGING SHARES
<TABLE>
<S> <C>
Smith You should contact your Salomon Smith Barney Financial Consultant
Barney or dealer representative to exchange into other Smith Barney funds.
offers a Be sure to read the prospectus of the Smith Barney fund you are
distinctive exchanging into. An exchange is a taxable transaction.
family of
funds - You may exchange shares only for shares of the same class of
tailored to another Smith Barney fund. Not all Smith Barney funds offer all
help meet classes.
the varying
needs of - Not all Smith Barney funds may be offered in your state of
both large residence. Contact your Salomon Smith Barney Financial Consultant,
and small dealer representative or the transfer agent.
investors
- You must meet the minimum investment amount for each fund.
- If you hold share certificates, the transfer agent
must receive the certificates endorsed for transfer or
with signed stock powers (documents transferring
ownership of certificates) before the exchange is
effective.
- The fund may suspend or terminate your exchange
privilege if you engage in an excessive pattern of
exchanges.
- --------------------------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at the time of
additional the exchange.
sales
charges Your deferred sales charge (if any) will continue to be measured from
the date of your original purchase. If the fund you
exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any
time into a fund with a lower charge, the sales charge
will not be reduced.
- --------------------------------------------------------------------------------------------------
By If you do not have a brokerage account, you may be eligible to
telephone exchange shares through the transfer agent. You must complete an
authorization form to authorize telephone transfers. If
eligible, you may make telephone exchanges on any day the
New York Stock Exchange is open. Call the transfer agent
at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(Eastern time). Requests received after the close of
regular trading on the Exchange are priced at the net
asset value next determined.
You can make telephone exchanges only between accounts
that have identical registrations.
- --------------------------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage
account, contact your dealer representative or write
to the transfer agent at the address on the opposite page.
</TABLE>
HIGH INCOME FUND -17-
<PAGE>
REDEEMING SHARES
<TABLE>
<S> <C>
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation,
other documents may be required.
Your redemption proceeds will be sent within three
business days after your request is received in good
order. However, if you recently purchased your shares by
check, your redemption proceeds will not be sent to you
until your original check clears, which may take up to 15
days.
If you have a Salomon Smith Barney brokerage account,
your redemption proceeds will be placed in your account
and not reinvested without your specific instruction. In
other cases, unless you direct otherwise, your redemption
proceeds will be paid by check mailed to your address of
record.
- --------------------------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written
requests to the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney High Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
Your written request must provide the following:
- Your account number
- The class of shares and the dollar amount or number of
shares to be redeemed
- Signatures of each owner exactly as the account is
registered
</TABLE>
- -18-
<PAGE>
<TABLE>
<S> <C>
By If you do not have a brokerage account, you may be eligible to
telephone redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent.
You must complete an authorization form to authorize
telephone redemptions. If eligible, you may request
redemptions by telephone on any day the New York Stock
Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
time). Requests received after the close of regular
trading on the Exchange are priced at the net asset value
next determined.
Your redemption proceeds can be sent by check to your
address of record or by wire transfer to a bank account
designated on your authorization form. You 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 You can arrange for the automatic redemption of a portion
cash of your shares on a monthly or quarterly basis. To
withdrawal qualify you must own shares of the fund with a value of
plans 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.
</TABLE>
HIGH INCOME FUND -19-
<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
- Dollar amount or number of shares being bought, exchanged or
redeemed
- Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
SIGNATURE GUARANTEES To be in good order, your redemption request must include a
signature guarantee if you:
- - Are redeeming over $10,000 of shares
- - Are sending signed share certificates or stock powers to the transfer
agent
- - Instruct the transfer agent to mail the check to an address different
from the one on your account
- - Changed your account registration
- - Want the check paid to someone other than the account owner(s)
- - Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
- -20-
<PAGE>
The fund has the right to:
- - Suspend the offering of shares
- - Waive or change minimum and additional investment amounts
- - Reject any purchase or exchange order
- - Change, revoke or suspend the exchange privilege
- - Suspend telephone transactions
- - Suspend or postpone redemptions of shares on any day when trading on the
New York Stock Exchange is restricted, or as otherwise permitted by the
Securities and Exchange Commission
- - Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
SHARE CERTIFICATES The fund does not issue share certificates unless a written
request 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.
HIGH INCOME FUND -21-
<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 and Class L 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 that 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 L shares are eligible to exchange into Class A shares not later
than 8 years after the plan joined the program. They are eligible for
exchange sooner:
If the account was opened on or after June 21, 1996 and an
aggregate of $1 million is invested in Smith Barney Funds Class L
shares (other than money market funds), all Class L shares are
eligible for exchange after the plan is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the
aggregate is invested in Smith Barney Funds Class L shares (other
than money market funds), all Class L shares are eligible for
exchange on each December 31 and the exchange will occur no later
than March 31 of the following year.
For more information, call your Salomon Smith Barney Financial Consultant or the
transfer agent, or consult the SAI.
- -22-
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund generally pays dividends monthly and makes capital gain
distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be primarily from income. You do not pay a sales charge on
reinvested distributions 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
distributions (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>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a capital gain distribution or a
dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
HIGH INCOME FUND -23-
<PAGE>
SHARE PRICE
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. When reliable market prices or quotations are not readily available,
or when the value of a security has been materially affected by events occurring
after a foreign exchange closes, the fund may price those securities at fair
value. Fair value is determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price securities may value those
securities higher or lower than another fund using market quotations to price
the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).
- -24-
<PAGE>
For a Class A share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $11.82 $10.98 $11.10 $11.16
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 1.02 1.09 1.08 1.08
Net realized and unrealized
gain/(loss) (0.01) 0.83 (0.12) (0.02)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.01 1.92 0.96 1.06
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.09) (1.08) (1.08) (1.05)
Capital -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (1.08) (1.08) (1.12)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.74 $11.82 $10.98 $11.10
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 8.85% 18.31% 8.95% 10.28%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'s $512 $424 $341 $317
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.05% 1.06% 1.10% 1.11%
Net investment income 8.61 9.57 9.65 10.03
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 102% 78% 72% 60%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
HIGH INCOME FUND -25-
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $11.83 $10.99 $11.11 $11.16
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.96 1.03 1.02 1.03
Net realized and unrealized
gain/(loss) (0.01) 0.83 (0.12) (0.02)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.95 1.86 0.90 1.01
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.03) (1.02) (1.02) (0.99)
Capital -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.03) (1.02) (1.02) (1.06)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.75 $11.83 $10.99 $11.11
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 8.34% 17.72% 8.41% 9.77%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'s $859 $681 $560 $478
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.55% 1.55% 1.59% 1.61%
Net investment income 8.11 9.07 9.16 9.52
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 102% 78% 72% 60%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -26-
<PAGE>
For a Class L share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999 1998(1) 1997 1996 1995(2)(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $11.84 $11.00 $11.11 $10.90
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.97 1.04 1.03 0.95
Net realized and unrealized
gain/(loss) (0.01) 0.83 (0.11) 0.23
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS 0.96 1.87 0.92 1.18
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.04) (1.03) (1.03) (0.90)
Capital -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.04) (1.03) (1.03) (0.97)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR $11.76 $11.84 $11.00 $11.11
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 8.38% 17.77% 8.56% 11.50%(4)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'s $93 $44 $21 $6
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.48% 1.48% 1.51% 1.56%(5)
Net investment income 8.15 9.14 9.23 9.58(5)
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 102% 78% 72% 60%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) On November 7, 1994 the former Class D shares were renamed Class C shares.
(3) For the period from August 24, 1994 (inception date) to July 31, 1995.
(4) Not annualized.
(5) Annualized.
HIGH INCOME FUND -27-
<PAGE>
For a Class Y share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $11.84 $ 10.99 $11.10 $10.88
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 1.05 1.12 0.92 0.09
Net realized and unrealized
gain/(loss) (0.01) 0.84 (0.11) 0.23
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS 1.04 1.96 0.81 0.32
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.11) (1.11) (0.92) (0.03)
Capital -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.11) (1.11) (0.92) (0.10)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR $11.77 $11.84 $10.99 $11.10
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 9.18% 18.68% 9.32% 2.91%(2)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'s $212 $139 $35 $10
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.72% 0.73% 0.76% 0.86(3)
Net investment income (loss) 8.83% 9.90 9.98 10.28(3
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 102% 78% 72% 60%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 28, 1995 (inception date) to July 31, 1995.
(2) Not annualized.
(3) Annualized.
- -28-
<PAGE>
<TABLE>
<S> <C>
</TABLE>
HIGH INCOME FUND -29-
<PAGE>
SALOMON SMITH BARNEY(SM)
A MEMBER OF CITIGROUP [SYMBOL]
HIGH INCOME FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE Our web site is located at www.smithbarney.com
You can also review 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
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same
information free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(SM) Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
[FD00000 __/99]
<PAGE>
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
------------------------------------------------------------------
November 30, 1999 MUNICIPAL HIGH INCOME FUND
Class A, B, L and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
Municipal High Income Fund
<PAGE>
MUNICIPAL HIGH INCOME FUND
CONTENTS
Investments, risks and performance....................4
More on the fund's investments........................8
Management............................................9
Choosing a class of shares to buy....................10
Comparing the fund's classes.........................11
Sales charges........................................12
More about deferred sales charges....................15
Buying shares........................................16
Exchanging shares....................................17
Redeeming shares.....................................18
Other things to know about
share transactions.................................20
Dividends, distributions and taxes...................22
Share price..........................................23
Financial highlights.................................24
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.
Municipal High Income Fund -3-
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks to maximize current income exempt from federal income taxes.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests primarily in intermediate-term and long-term
municipal securities rated medium investment grade, low investment grade or
below investment grade by a nationally recognized rating organization or if
unrated, of comparable quality. Municipal securities include bonds and leases
issued by any of the 50 states and certain other municipal issuers, political
subdivisions, agencies and public authorities that pay interest which is exempt
from regular federal income taxes. Intermediate-term and long-term municipal
securities have remaining maturities at the time of purchase of from three to
more than thirty years. Investment grade bonds are those rated in any of the
four highest long-term rating categories, or if unrated, of comparable quality.
The fund may invest up to 50% of its assets in obligations rated below
investment grade, or if unrated, of comparable quality.
SELECTION PROCESS The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting
individual securities, the manager:
- - Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit
opportunities in the municipal bond market
- - Measures the potential impact of supply/demand imbalances for obligations
of different states, the yields available for securities with different
maturities and a security's maturity in light of the outlook for interest
rates to identify individual securities that balance potential return and
risk
- - May trade between general obligation and revenue bonds and among various
revenue bond sectors, such as housing, hospital and industrial development,
based on their apparent relative values
- - Seeks to identify individual securities with the most potential for added
value, such as those involving unusual situations, new issuers, the
potential for credit upgrades, unique structural characteristics or
innovative features
- -4-
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
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:
- - Interest rates rise, causing the value of the fund's portfolio to decline
- - The issuer of a security owned by the fund defaults on its obligation to
pay principal and/or interest or the security's credit rating is
downgraded. This risk is higher for below investment grade bonds, as
described below
- - Municipal securities fall out of favor with investors
- - Interest rates rise above the coupon rate on one or more bonds held by the
fund, extending the effective maturity date and causing increased price
sensitivity. This is known as "extension risk"
- - Issuers of bonds held by the fund exercise call options, forcing the fund
to reinvest the proceeds in lower yielding securities. This is known as
"prepayment risk."
- - Unfavorable legislation affects the tax-exempt status of municipal bonds
- - The manager's judgment about the attractiveness, value or income
potential of a particular security proves to be incorrect
Below investment grade fixed income 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 liquid, and may be more difficult to value. Changes in economic
conditions or other circumstances are likely to weaken the capacity of issuers
of these securities to make principal and interest payments.
It is possible that some of the fund's income distributions may be, and
distributions of the fund's gains generally will be, subject to federal
taxation. The fund may realize taxable gains on the sale of its securities or on
transactions in derivatives. Some of the fund's income may be subject to the
federal alternative minimum tax. In addition, distributions of the fund's income
and gains will be subject to state personal income taxation.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- - Are a taxpayer in a high federal tax bracket seeking income exempt from
federal taxation
- - Currently have exposure to other asset classes and are seeking to broaden
your investment portfolio
- - Are willing to accept the risks of below-investment grade municipal
securities
Municipal High Income Fund -5-
<PAGE>
RISK/RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[BAR CHART]
<TABLE>
<CAPTION>
Total Return for Class B Shares
- -----------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
</TABLE>
This bar chart shows the performance of the fund's Class B shares for each of
the past 10 calendar years. Class A, L and Y shares would have different
performance because of their different expenses. The performance information in
the chart does not reflect sales charges, which would reduce your return.
QUARTERLY RETURNS: Highest: xx% in ___ quarter 199X; Lowest: xx% in ___ quarter
199X Year to date: xx% through 9/30/99
RISK/RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Brothers Municipal Bond Index (the "Lehman Municipal Index"), a broad-based
unmanaged index of investment grade municipal bonds with maturities greater than
one year. 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 n/a 11/6/92
B 9/2/86
L n/a 11/17/94
Y n/a 11/6/92
Lehman
Municipal Index * n/a
</TABLE>
*Index comparison begins on _____________.
- -6-
<PAGE>
FEES TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 4.00% None 1.00% None
purchases (as a % of offering price)
Maximum deferred sales charge (load) (as a % of None* 4.50% 1.00% None
the lower of net asset value at purchase or
redemption)
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
Management fee 0.60% 0.60% 0.60% 0.60%
Distribution and service (12b-1) fee 0.15% 0.65% 0.70% None
Other expenses
---- ---- ---- ----
Total annual fund operating expenses
==== ==== ==== ====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
EXAMPLE
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
- - You invest $10,000 in the fund for the period shown
- - Your investment has a 5% return each year
- - You reinvest all distributions and dividends without a sales charge
- - The fund's operating expenses remain the same
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without redemption) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
</TABLE>
Municipal High Income Fund -7-
<PAGE>
MORE ON THE FUND'S INVESTMENTS
MUNICIPAL SECURITIES Municipal securities are debt obligations issued by any of
the 50 states and their political subdivisions, agencies and public authorities
(together with certain other governmental issuers such as Puerto Rico, the
Virgin Islands and Guam). The interest on these bonds is exempt from federal
income tax. As a result, the interest rate payable on these bonds normally is
lower than that payable on bonds whose interest is subject to federal income
taxation. The municipal securities in which the fund invests include general
obligation bonds, revenue bonds and notes, and municipal leases. These
securities may pay interest at fixed, variable or floating rates. Municipal
leases are participations in debt obligations issued by municipalities
consisting of leases or installment contracts for property or equipment. The
fund may also hold zero coupon securities which pay no interest during the life
of the obligation but trade at prices below their stated maturity value.
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as financial futures and options on financial futures, for any of the following
purposes:
- - To hedge against the economic impact of adverse changes in the market value
of portfolio securities because of changes in interest rates
- - As a substitute for buying or selling securities
A futures 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.
Even a small investment in futures can have a big impact on a fund's interest
rate exposure. Therefore, using futures can disproportionately increase losses
and reduce opportunities for gains when interest rates are changing. The fund
may not fully benefit from or may lose money on futures if changes in their
value do not correspond accurately to changes in the value of the fund's
holdings. The other parties to certain futures present the same types of default
risk as issuers of fixed income securities. Futures can also make a fund less
liquid and harder to value, especially in declining markets.
DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
- -8-
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager selects the
fund's investments and oversees its operations. The manager and Salomon Smith
Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
- -- and use diverse channels to make them available to consumer and corporate
customers around the world.
Peter M. Coffey, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund's portfolio since February 1999. Mr. Coffey has over 30 years of securities
business experience.
MANAGEMENT FEES During the fund's most recent fiscal year, the manager received
an advisory fee and an administrative fee equal to ___% and ___%, respectively,
of the fund's average daily net assets.
DISTRIBUTOR The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that 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.
Municipal High Income Fund -9-
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among four classes of shares: Classes A, B, L 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 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
and Class L shares, but only if the fund performs well.
- - Class L 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 shares do not, Class B shares may be more attractive to long-term
investors.
You may buy shares from:
- - A Salomon Smith Barney Financial Consultant
- - An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
- - The fund, but only if you are investing through certain 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 CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans $50 n/a $50
Uniform Gift to Minor Accounts $250 $15 million $50
</TABLE>
- -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 compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
KEY - Initial sales - No initial sales - Initial sales - No initial or
FEATURES charge charge charge is lower deferred sales
- You may qualify - Deferred sales than Class A charge
for reduction or charge declines - Deferred sales - Must invest at
waiver of initial over time charge for only 1 least $15 million
sales charge - Converts to year - Lower annual
- Lower annual Class A after - Does not convert expenses than
expenses than 8 years to Class A other classes
Class B and - Higher annual - Higher annual
Class L expenses than expenses than the
Class A Class A
INITIAL SALES Up to 4.00%; None 1.00% None
CHARGE reduced for large
purchases and
waived for certain
investors. No
charge for
purchases of
$500,000 or more
DEFERRED 1% on purchases of Up to 4.50% 1% if you redeem None
SALES CHARGE $500,000 or more if charged when you within 1 year of
you redeem within redeem shares. purchase
1 year of purchase The charge is
reduced over time
and there is no
deferred sales
charge after 6
years
ANNUAL 0.15% of average 0.65% of average 0.70% of average None
DISTRIBUTION daily net assets daily net assets daily net assets
AND SERVICE
FEES
EXCHANGE Class A shares of Class B shares of Class L shares of Class Y shares of
PRIVILEGE* most Smith Barney most Smith Barney most Smith most Smith Barney
funds funds Barney 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.
Municipal High Income Fund -11-
<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 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
- - Accumulation privilege - lets you combine the current value of Class A
shares owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- - Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- - Employees of members of the NASD
- - Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- - Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
- -12-
<PAGE>
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").
Municipal High Income Fund -13-
<PAGE>
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
6th
Year after purchase 1st 2nd 3rd 4th 5th through
8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
SHARES ISSUED: SHARES ISSUED: SHARES ISSUED:
AT INITIAL ON REINVESTMENT OF UPON EXCHANGE FROM
PURCHASE DIVIDENDS AND ANOTHER SMITH BARNEY
DISTRIBUTIONS FUND
- ------------------------------------------------------------------------------------
<S> <C> <C>
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total have converted into Class A
Class B shares you own shares
(excluding shares issued
as a dividend)
</TABLE>
CLASS L SHARES
You buy Class L 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 shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998, you
will not pay an initial sales charge on Class L 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.
- -14-
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
- - Shares exchanged for shares of another Smith Barney fund
- - Shares representing reinvested distributions and dividends
- - Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
DEFERRED SALES CHARGE WAIVERS
The deferred sales charge for each share class will generally be waived:
- - On payments made through certain systematic withdrawal plans
- - For involuntary redemptions of small account balances
- - For 12 months following the death or disability of a shareholder
If you want to learn about additional waivers of deferred sales charges, contact
your Salomon Smith Barney Financial Consultant or dealer representative or
consult the SAI.
Municipal High Income Fund -15-
<PAGE>
BUYING SHARES
<TABLE>
<S> <C>
Through a You should contact your Salomon Smith Barney Financial Consultant
Salomon or dealer representative to open a brokerage account and make
Smith arrangements to buy shares.
Barney
Financial If you do not provide the following information, your order will be
represen- rejected:
tative
- 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 Certain investors who are clients of the selling group are eligible to
fund's buy shares directly from the fund.
transfer
agent - Write the transfer agent at the following address:
SMITH BARNEY INCOME FUNDS
MUNICIPAL HIGH INCOME FUND
(SPECIFY CLASS OF SHARES)
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 9699
PROVIDENCE, RHODE ISLAND 02940-9699
- Enclose a check to pay for the shares. For initial purchases,
complete and send an account application.
- For more information, call the transfer agent at
1-800-451-2010.
- ------------------------------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your dealer representative
systematic or the transfer agent to transfer funds automatically from a regular
investment bank account, cash held in a Salomon Smith Barney brokerage account
plan or Smith Barney money market fund to buy shares on a regular basis.
- Amounts transferred should be at least: $25 monthly or $50
quarterly
- If you do not have sufficient funds in your account on a
transfer date, Salomon Smith Barney, your dealer
representative or the transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or consult the
SAI.
</TABLE>
- -16-
<PAGE>
EXCHANGING SHARES
<TABLE>
<S> <C>
Smith You should contact your Salomon Smith Barney Financial Consultant
Barney or dealer representative to exchange into other Smith Barney funds.
offers a Be sure to read the prospectus of the Smith Barney fund you are
distinctive exchanging into. An exchange is a taxable transaction.
family of
funds - You may exchange shares only for shares of the same class of
tailored to another Smith Barney fund. Not all Smith Barney funds offer all
help meet classes.
the varying
needs of - Not all Smith Barney funds may be offered in your state of
both large residence. Contact your Salomon Smith Barney Financial Consultant,
and small dealer representative or the transfer agent.
investors
- You must meet the minimum investment amount for each fund.
- If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers (documents transferring ownership of certificates)
before the exchange is effective.
- The fund may suspend or terminate your exchange privilege
if you engage in an excessive pattern of exchanges.
- ------------------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at the time of
additional the exchange.
sales
charges Your deferred sales charge (if any) will continue to be measured from
the date of your original purchase. If the fund you exchange
into has a higher deferred sales charge, you will be subject to
that charge. If you exchange at any time into a fund with a
lower charge, the sales charge will not be reduced.
- ------------------------------------------------------------------------------------------
By If you do not have a brokerage account, you may be eligible to
telephone exchange shares through the transfer agent. You must complete an
authorization form to authorize telephone transfers. If
eligible, you may make telephone exchanges on any day the New
York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time).
Requests received after the close of regular trading on the
Exchange are priced at the net asset value next determined.
You can make telephone exchanges only between accounts that
have identical registrations.
- ------------------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the opposite page.
</TABLE>
Municipal High Income Fund -17-
<PAGE>
REDEEMING SHARES
<TABLE>
<S> <C>
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must receive
the certificates endorsed for transfer or with signed stock
powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However, if
you recently purchased your shares by check, your redemption
proceeds will not be sent to you until your original check
clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- ------------------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written
requests to the transfer agent at the following address:
Smith Barney Income Funds
Municipal High Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
Your written request must provide the following:
- Your account number
- The class of shares and the dollar amount or number of
shares to be redeemed
- Signatures of each owner exactly as the account is
registered
</TABLE>
- -18-
<PAGE>
<TABLE>
<S> <C>
By If you do not have a brokerage account, you may be eligible to
telephone redeem shares in amounts up to $10,000 per day through the
transfer agent. You must complete an authorization form to
authorize telephone redemptions. If eligible, you may request
redemptions by telephone on any day the New York Stock Exchange
is open. Call the transfer agent at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net
asset value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You 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 You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
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.
</TABLE>
Municipal High Income Fund -19-
<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 o Dollar amount or
number of shares being bought, exchanged or redeemed
- Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
SIGNATURE GUARANTEES To be in good order, your redemption request must include a
signature guarantee if you:
- - Are redeeming over $10,000 of shares
- - Are sending signed share certificates or stock powers to the transfer agent
- - Instruct the transfer agent to mail the check to an address different from
the one on your account
- - Changed your account registration
- - Want the check paid to someone other than the account owner(s)
- - Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
- -20-
<PAGE>
The fund has the right to:
- - Suspend the offering of shares
- - Waive or change minimum and additional investment amounts
- - Reject any purchase or exchange order
- - Change, revoke or suspend the exchange privilege
- - Suspend telephone transactions
- - Suspend or postpone redemptions of shares on any day when trading on the
New York Stock Exchange is restricted, or as otherwise permitted by the
Securities and Exchange Commission
- - Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
SHARE CERTIFICATES The fund does not issue share certificates unless a written
request 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.
Municipal High Income Fund -21-
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund pays dividends each month from its net investment income. The
fund generally makes capital gain distributions, if any, once a year, typically
in December. The fund may pay additional distributions and dividends at other
times if necessary for the fund to avoid a federal tax. Capital gain
distributions and dividends are reinvested in additional fund shares of the same
class you hold. The fund expects distributions to be primarily from income. You
do not pay a sales charge on reinvested distributions 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
distributions (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 Taxable gain
distributions
Short-term capital gain Ordinary income
distributions
Dividends Exempt if from interest on tax-exempt
securities, otherwise ordinary income
</TABLE>
Any taxable dividends and capital gain distributions 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 taxable dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
- -22-
<PAGE>
SHARE PRICE
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the market on which the security is
principally traded, that security may be valued by another method that the
fund's board believes accurately reflects fair value. A fund that uses fair
value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the 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.
Municipal High Income Fund -23-
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF $ $18.07 $17.31 $17.25 $17.26
YEAR
- ------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.95 0.97 1.00 1.04
Net realized and unrealized
gain/(loss) 0.19 0.77 0.06 0.01(1)
- ------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.14 1.74 1.06 1.05
- ------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.98) (0.98) (1.00) (1.00)
Net realized gain (0.27) 0.00(2) -- (0.02)
Capital -- -- -- (0.04)
- ------------------------------------------------------------------------------------
Total distributions (1.25) (0.98) (1.00) (1.06)
- ------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.96 $18.07 $17.31 $17.25
- ------------------------------------------------------------------------------------
TOTAL RETURN 6.54% 10.40% 6.28% 6.42%
- ------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $268 $254 $232 $238
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.83% 0.83% 0.84% 0.84%
Net investment income 5.24 5.52 5.74 6.04
- ------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 84% 51% 44% 38%
- ------------------------------------------------------------------------------------
</TABLE>
(1) Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than the
beginning of the period.
(2) Amount represents less than $0.01 per share.
- -24-
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF $ $18.09 $17.32 $17.26 $17.26
YEAR
- ---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.86 0.89 0.92 0.95
Net realized and unrealized
gain/(loss) 0.19 0.77 0.06 0.02(1)
- ---------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.05 1.66 0.98 0.97
- ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.89) (0.89) (0.92) (0.91)
Net realized gain (0.27) 0.00(2) -- (0.02)
Capital -- --- -- (0.04)
- ---------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.16) (0.89) (0.92) (0.97)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.98 $18.09 $17.32 $17.26
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN 6.01% 9.89% 5.74% 5.91%
- ---------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $471 $562 $653 $737
(millions)
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.32% 1.32% 1.33% 1.35%
Net investment income 4.75 5.04 5.23 5.61
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 84% 51% 44% 38%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than the
beginning of the period.
(2) Amount represents less than $0.01 per share.
Municipal High Income Fund -25-
<PAGE>
For a Class L share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1999 1998(1) 1997 1996 1995(2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF $ $18.07 $17.31 $17.25 $15.83
YEAR
- ---------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.87 0.88 0.89 0.60
Net realized and unrealized 0.16
gain/(loss)(3) 0.77 0.08 1.50
- ---------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM 1.03 1.65 0.97 2.10
OPERATIONS
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.88) (0.89) (0.91) (0.62)
Net realized gain (0.27) 0.00(4) -- (0.02)
Capital -- -- -- (0.04)
- ---------------------------------------------------------------------------------
Total distributions (1.15) (0.89) (0.91) (0.68)
- ---------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR $17.95 $18.07 $17.31 $17.25
- ---------------------------------------------------------------------------------
TOTAL RETURN 5.91% 9.79% 5.69 13.45%(5)
- ---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $1,869 $752 $546 $211
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.42% 1.40% 1.39% 1.18% (6)
Net investment income 4.64 4.94 5.18 5.56(6)
- ---------------------------------------------------------------------------------
Portfolio turnover rate 84% 51% 44% 38%
- ---------------------------------------------------------------------------------
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the period from November 17, 1994 (inception date) to July 31, 1995.
(3) Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than the
beginning of the period.
(4) Amount represents less than $0.01 per share.
(5) Not annualized.
(6) Annualized.
-26-
<PAGE>
SALOMON SMITH BARNEY(SM)
A MEMBER OF CITIGROUP [SYMBOL]
MUNICIPAL HIGH INCOME FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE Our web site is located at www.smithbarney.com
You can also review 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
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(SM) Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
[FD00000 6/99]
<PAGE>
----------------------------
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
----------------------------
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
- --------------------------------------------------------------------------------
November 30, 1999 TOTAL RETURN BOND FUND
Class A, B, L and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
TOTAL RETURN BOND FUND
-----------------------------------------------------
CONTENTS
-----------------------------------------------------
Investments, risks and performance .......... 4
More on the fund's investments .............. 8
Management .................................. 9
Choosing a class of shares to buy ........... 10
Comparing the fund's classes ................ 11
Sales charges ............................... 12
More about deferred sales charges ........... 15
Buying shares ............................... 16
Exchanging shares ........................... 17
Redeeming shares ............................ 18
Other things to know about
share transactions ........................ 20
Smith Barney 401(k) and
ExecChoice-TM- programs ................... 22
Dividends, distributions and
taxes ..................................... 23
Share price ................................. 24
Financial highlights ........................ 24
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.
-3-
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The fund seeks to maximize total return consisting of capital appreciation and
income.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests primarily in the following types of fixed
income securities:
- - Securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. government securities")
- - High grade mortgage-related securities issued by various governmental and
non-governmental entities
- - Investment grade corporate debt securities
- - Investment grade taxable municipal securities
- - Investment grade asset backed securities
The fund may invest in securities of any maturity, and its effective portfolio
maturity will vary based on the manager's outlook for interest rates.
SELECTION PROCESS The manager actively allocates and reallocates the fund's
investments among the above securities categories. In allocating investments
among categories, the manager considers economic and market conditions and the
relative risks and opportunities of each category. The manager looks for:
- - categories most favorably positioned in light of the manager's interest rate
outlook
- - categories with favorable relative yields of securities and at various
maturities
- - categories with the highest availability of attractive securities
Once the fund's category allocation has been determined, the manager selects
individual securities within each category. The manager uses fundamental and
quantitative analysis to select individual securities. The manager looks for:
- - Stable or improving credit quality
- - Low price relative to credit and interest characteristics
- - Potential for credit upgrades, unique structural
characteristics or innovative features
- -4-
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
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:
- - Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
- - As interest rates decline, the issuers of securities held by the fund may
pay principal earlier than scheduled or exercise a right to call the
securities, forcing the fund to reinvest in lower yielding securities. This
is known as prepayment or call risk
- - As interest rates increase, slower than expected principal payments may
extend the average life of fixed income securities held by the fund, locking
in below market interest rates and reducing the value of these securities.
This is known as extension risk
- - The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded
- - The manager's judgment about the attractiveness, relative yield, value or
potential appreciation of a particular security or a particular category of
fixed income securities proves to be incorrect
The fund's ability to achieve its investment goal of total return, consisting of
interest income and capital appreciation, is limited because the fund invests
primarily in fixed-income securities.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- - Are seeking total return through an investment in fixed income securities
- - Are willing to accept the risks of various categories of fixed income
investments
-5-
<PAGE>
TOTAL RETURN AND PERFORMANCE
The fund's total return will vary from year to year, and its performance will
vary compared with that of unmanaged United States government and corporate
bond indices. Although variations
in the fund's performance are an indication of the risks of investing in the
fund, past performance does not necessarily indicate how the fund will perform
in the future.
- -6-
<PAGE>
FEES TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment) CLASS A CLASS B CLASS L CLASS Y
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 4.50% None 1.00% None
purchases (as a % of offering price)
Maximum deferred sales charge (load) (as a % of None* 4.50% 1.00% None
the lower of net asset value at purchase or
redemption)
- -------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
- -------------------------------------------------------------------------------------
Management fee 0.65% 0.65% 0.65% 0.65%
- -------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 0.75% 0.70% None
- -------------------------------------------------------------------------------------
Other expenses
----- ----- ----- -----
- -------------------------------------------------------------------------------------
Total annual fund operating expenses
----- ----- ----- -----
----- ----- ----- -----
- -------------------------------------------------------------------------------------
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
EXAMPLE
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
- - You invest $10,000 in the fund for the period shown
- - Your investment has a 5% return each year
- - You reinvest all distributions and dividends without a sales charge
- - The fund's operating expenses remain the same
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (WITH OR WITHOUT REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class B (REDEMPTION AT END OF PERIOD) $ $ $ $
- --------------------------------------------------------------------------------
Class B (NO REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class L (REDEMPTION AT END OF PERIOD) $ $ $ $
- --------------------------------------------------------------------------------
Class L (NO REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
Class Y (WITH OR WITHOUT REDEMPTION) $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
- -------------------------------------------------------------------------------
MORE ON THE FUND'S INVESTMENTS
- -------------------------------------------------------------------------------
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities, interest rate futures and options on interest rate
futures to hedge against the economic impact of adverse changes in the market
value of portfolio securities, because of changes in interest rates; or
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 indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's securities market or interest rate exposure. Therefore, using
derivatives can disproportionately increase losses and reduce opportunities for
gains when interest rates, exchange rates or securities markets 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. The fund may invest up to 10% of its assets in options for hedging
purposes.
SHORT-TERM INVESTMENTS Under normal market conditions, the fund may invest up to
20% of its assets in cash or short-term money market instruments, including U.S.
government securities, bank obligations and commercial paper.
LOWER RATED SECURITIES The fund may invest up to 10% of its assets in securities
rated below investment grade and in unrated securities of comparable quality.
These securities, commonly known as "junk bonds," are considered speculative in
that their issues may have a diminished capacity to pay principal and interest.
These securities have a higher risk of default, tend to be less liquid, and may
be more difficult to value.
YANKEE BONDS The fund may invest in Yankee Bonds, which are U.S. dollar
denominated fixed income securities of foreign issuers. The value of these
securities may decline (i) if the U.S. and/or foreign fixed income markets
decline, (ii) if an adverse event depresses the value of an issuer's securities,
or (iii) because of foreign government actions, political instability or limited
availability of accurate information about foreign companies.
DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
- -8-
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager selects the
fund's investments and oversees its operations. The manager and Salomon Smith
Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
- -- and use diverse channels to make them available to consumer and corporate
customers around the world.
Joseph P. Deane, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund's portfolio since its inception in 1998. Mr. Deane has 29 years of
investment management experience.
MANAGEMENT FEE For its services, the manager received an advisory fee during the
fund's last fiscal year equal to 0.65% of the fund's average daily net assets.
In addition, the manager 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
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that 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.
-9-
<PAGE>
- --------------------------------------------------------------------------------
CHOOSING A CLASS OF SHARES TO BUY
- --------------------------------------------------------------------------------
You can choose among four classes of shares: Classes A, B, L 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 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 and Class L
shares, but only if the fund performs well.
- - Class L 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
shares do not, Class B shares may be more attractive to long-term investors.
You may buy shares from:
- - A Salomon Smith Barney Financial Consultant
- - An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
- - The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
INVESTMENT MINIMUMS Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
INITIAL ADDITIONAL
-------------------------- -----------
CLASSES A, B, L CLASS Y ALL CLASSES
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General $1,000 $15 million $50
- ------------------------------------------------------------------------------------------
IRAs, Self Employed Retirement Plans, Uniform $250 $15 million $50
Gift to Minor Accounts
- ------------------------------------------------------------------------------------------
Qualified Retirement Plans $25 $15 million $25
- ------------------------------------------------------------------------------------------
Simple IRAs $1 n/a $1
- ------------------------------------------------------------------------------------------
Monthly Systematic Investment Plans $25 n/a $25
- ------------------------------------------------------------------------------------------
Quarterly Systematic Investment Plans $50 n/a $50
- ------------------------------------------------------------------------------------------
</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
- -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 compensation
depending upon which class you choose.
<TABLE>
<S><C>
- ----------------------------------------------------------------------------------------
CLASS A CLASS B CLASS L CLASS Y
KEY FEATURES -Initial sales - No initial - Initial - No initial or
charge sales charge sales charge deferred sales
-You may qualify - Deferred is lower than charge
for reduction or sales charge Class A - Must invest at
waiver of declines over - Deferred least $15 million
initial sales time sales charge - Lower annual
charge - Converts to for only 1 year expenses than the
- Lower annual Class A after 8 - Does not other classes
expenses than years convert to
Class B and - Higher annual Class A
Class L expenses than - Higher
Class A annual
expenses than
Class A
- ----------------------------------------------------------------------------------------
INITIAL Up to 4.50%; None 1.00% None
SALES CHARGE reduced for
large purchases
and waived for
certain
investors. No
charge for
purchases of
$500,000 or more
- ----------------------------------------------------------------------------------------
DEFERRED 1% on purchases Up to 4.50% 1% if you None
SALES CHARGE of $500,000 or charged when redeem within
more if you you redeem 1 year of
redeem within 1 shares. The purchase
year of purchase charge is
reduced over
time and there
is no deferred
sales charge
after 6 years
- ----------------------------------------------------------------------------------------
ANNUAL 0.25% of average 0.75% of 0.70% of None
DISTRIBUTION daily net assets average daily average daily
AND SERVICE net assets net assets
FEES
- ----------------------------------------------------------------------------------------
EXCHANGEABLE Class A shares Class B shares Class L shares Class Y shares of
INTO* of most Smith of most Smith of most Smith most Smith Barney
Barney funds Barney funds Barney 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.
-11-
<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 4.50 4.71
- --------------------------------------------------------------------------
$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 2.50 2.56
- --------------------------------------------------------------------------
$250,000 but less than $500,000 1.50 1.52
- --------------------------------------------------------------------------
$500,000 or more -0- -0-
- --------------------------------------------------------------------------
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
ACCUMULATION PRIVILEGE - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- -12-
<PAGE>
LETTER OF INTENT - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge, if any, as if
all shares had been purchased at once. You may include purchases on which you
paid a sales charge within 90 days before you sign the letter.
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- - Employees of members of the NASD
- - 403(b) or 401(k) retirement plans, if certain conditions are met
- - Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- - Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
IF YOU WANT TO LEARN 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").
-13-
<PAGE>
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
6th through
Year after purchase 1st 2nd 3rd 4th 5th 8th
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.50% 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>
<S><C>
----------------------------------------------------------------------------------
SHARES ISSUED: SHARES ISSUED: SHARES ISSUED:
AT INITIAL ON REINVESTMENT OF UPON EXCHANGE FROM
PURCHASE DIVIDENDS AND ANOTHER SMITH BARNEY
DISTRIBUTIONS FUND
----------------------------------------------------------------------------------
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total have converted into Class A
Class B shares you own shares
(excluding shares issued
as a dividend)
----------------------------------------------------------------------------------
</TABLE>
CLASS L SHARES
You buy Class L 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 shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998, you
will not pay an initial sales charge on Class L 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.
- -14-
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT DEFERRED SALES CHARGES
- --------------------------------------------------------------------------------
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
- - Shares exchanged for shares of another Smith Barney fund
- - Shares representing reinvested distributions and dividends
- - Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
DEFERRED SALES CHARGE WAIVERS
The deferred sales charge for each share class will generally be waived:
- - On payments made through certain systematic withdrawal plans
- - On certain distributions from a retirement plan
- - For involuntary redemptions of small account balances
- - For 12 months following the death or disability of a shareholder
IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF DEFERRED SALES CHARGES, CONTACT
YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE OR
CONSULT THE SAI.
-15-
<PAGE>
- --------------------------------------------------------------------------------
BUYING SHARES
- --------------------------------------------------------------------------------
THROUGH A SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE
You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to open a brokerage account and make arrangements to buy shares.
If you do not provide the following information, your order will be rejected
- 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 FUND'S TRANSFER AGENT
Qualified retirement plans and certain other investors who are clients of the
selling group are eligible to buy shares directly from the fund.
- - Write the transfer agent at the following address:
SMITH BARNEY INCOME FUNDS
SMITH BARNEY TOTAL RETURN BOND FUND
(SPECIFY CLASS OF SHARES)
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 9699
PROVIDENCE, RHODE ISLAND 02940-9699
- - Enclose a check to pay for the shares. For initial purchases, complete and
send an account application.
- - For more information, call the transfer agent at 1-800-451-2010.
- --------------------------------------------------------------------------------
THROUGH A SYSTEMATIC INVESTMENT PLAN
You may authorize Salomon Smith Barney, your dealer representative or the
transfer agent to transfer funds automatically from a regular bank account, cash
held in a Salomon Smith Barney brokerage account or Smith Barney money market
fund to buy shares on a regular basis.
- - Amounts transferred should be at least: $25 monthly or $50 quarterly
- - If you do not have sufficient funds in your account on a transfer date,
Salomon Smith Barney, your dealer representative or the transfer agent may
charge you a fee
FOR MORE INFORMATION, CONTACT YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT,
DEALER REPRESENTATIVE OR THE TRANSFER AGENT OR CONSULT THE SAI.
- -16-
<PAGE>
- --------------------------------------------------------------------------------
EXCHANGING SHARES
- --------------------------------------------------------------------------------
SMITH BARNEY OFFERS A DISTINCTIVE FAMILY OF FUNDS TAILORED TO HELP MEET THE
VARYING NEEDS OF BOTH LARGE AND SMALL INVESTORS
You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to exchange into other Smith Barney funds. Be sure to read the
prospectus of the Smith Barney fund you are exchanging into. An exchange is a
taxable transaction.
- - You may exchange shares only for shares of the same class of another Smith
Barney 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.
- --------------------------------------------------------------------------------
WAIVER OF ADDITIONAL SALES CHARGES
Your shares will not be subject to an initial sales charge at the time of the
exchange.
Your deferred sales charge (if any) will continue to be measured from the date
of your original purchase. If the fund you exchange into has a higher deferred
sales charge, you will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be reduced.
- --------------------------------------------------------------------------------
BY TELEPHONE
If you do not have a brokerage account, you may be eligible to exchange shares
through the transfer agent. You must complete an authorization form to authorize
telephone transfers. If eligible, you may make telephone exchanges on any day
the New York Stock Exchange is open. Call the transfer agent at 1-800-451-2010
between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net asset value next
determined.
You can make telephone exchanges only between accounts that have identical
registrations.
- --------------------------------------------------------------------------------
BY MAIL
If you do not have a Salomon Smith Barney brokerage account, contact your dealer
representative or write to the transfer agent at the address on the opposite
page.
-17-
<PAGE>
- --------------------------------------------------------------------------------
REDEEMING SHARES
- --------------------------------------------------------------------------------
GENERALLY
Contact your Salomon Smith Barney Financial Consultant or dealer representative
to redeem shares of the fund.
If you hold share certificates, the transfer agent must receive the certificates
endorsed for transfer or with signed stock powers before the redemption is
effective.
If the shares are held by a fiduciary or corporation, other documents may be
required.
Your redemption proceeds will be sent within three business days after your
request is received in good order. However, if you recently purchased your
shares by check, your redemption proceeds will not be sent to you until your
original check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your redemption proceeds
will be placed in your account and not reinvested without your specific
instruction. In other cases, unless you direct otherwise, your redemption
proceeds will be paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
BY MAIL
For accounts held directly at the fund, send written requests to the transfer
agent at the following address:
Smith Barney Income Funds
Smith Barney Total Return Bond Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
Your written request must provide the following:
- - Your account number
- - The class of shares and the dollar amount or number of shares to be redeemed
- - Signatures of each owner exactly as the account is registered
- -18-
<PAGE>
BY TELEPHONE
If you do not have a brokerage account, you may be eligible to redeem shares
(except those held in retirement plans) in amounts up to $10,000 per day through
the transfer agent. You must complete an authorization form to authorize
telephone redemptions. If eligible, you may request redemptions by telephone on
any day the New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received
after the close of regular trading on the Exchange are priced at the net asset
value next determined.
Your redemption proceeds can be sent by check to your address of record or by
wire transfer to a bank account designated on your authorization form. You 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 WITHDRAWAL PLANS
You can arrange for the automatic redemption of a portion of your shares on a
monthly or quarterly basis. To qualify you must own shares of the fund with a
value of at least $10,000 ($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.
-19-
<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
- Dollar amount or number of shares being bought, exchanged or
redeemed
- Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
SIGNATURE GUARANTEES To be in good order, your redemption request must include a
signature guarantee if you:
- - Are redeeming over $10,000 of shares
- - Are sending signed share certificates or stock powers to the transfer agent
- - Instruct the transfer agent to mail the check to an address different from the
one on your account
- - Changed your account registration
- - Want the check paid to someone other than the account owner(s)
- - Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
- -20-
<PAGE>
The fund has the right to:
- - Suspend the offering of shares
- - Waive or change minimum and additional investment amounts
- - Reject any purchase or exchange order
- - Change, revoke or suspend the exchange privilege
- - Suspend telephone transactions
- - Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
- - Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
SHARE CERTIFICATES The fund does not issue share certificates unless a written
request 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.
-21-
<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 and Class L 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 that 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
L shares are eligible to exchange into Class A shares not later than 8 years
after the plan joined the program. They are eligible for exchange sooner:
If the account was opened on or after June 21, 1996 and an aggregate of
$1 million is invested in Smith Barney Funds Class L shares (other than
money market funds), all Class L shares are eligible for exchange after
the plan is in the program 5 years.
If the account was opened before June 21, 1996 and $500,000 in the
aggregate is invested in Smith Barney Funds Class L shares (other than
money market funds), all Class L shares are eligible for exchange on
each December 31 and the exchange will occur no later than March 31 of
the following year.
FOR MORE INFORMATION, CALL YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR THE
TRANSFER AGENT, OR CONSULT THE SAI.
- -22-
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS The fund generally pays dividends monthly and makes capital gain
distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be primarily from income. You do not pay a sales charge on
reinvested distributions 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
distributions (whether in cash or additional shares) are all taxable events.
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------
TRANSACTION FEDERAL TAX STATUS
- -----------------------------------------------------------------------------------------
Redemption or exchange of shares Usually capital gain or loss; long-term only
if shares owned more than one year
- -----------------------------------------------------------------------------------------
Long-term capital gain distributions Long-term capital gain
- -----------------------------------------------------------------------------------------
Short-term capital gain distributions Ordinary income
- -----------------------------------------------------------------------------------------
Dividends Ordinary income
- -----------------------------------------------------------------------------------------
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a capital gain distribution or a
dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
-23-
<PAGE>
- -------------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------------
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. When reliable market prices or quotations are not readily available,
or when the value of a security has been materially affected by events occurring
after a foreign exchange closes, the fund may price those securities at fair
value. Fair value is determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price securities may value those
securities higher or lower than another fund using market quotations to price
the same securities.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
performance of each class since inception. 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, is included in the annual report (available upon
request).
- -24-
<PAGE>
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1999 1998*
- ---------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $
- ---------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income
Net realized and unrealized
gain/(loss)
- ---------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS
- ---------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
Net realized gain
Capital
- ---------------------------------------------------------------------------
Total distributions
- ---------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR
- ---------------------------------------------------------------------------
TOTAL RETURN
- ---------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
- ---------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
- ---------------------------------------------------------------------------
</TABLE>
*For the period from 2/27/98 (inception date) through 7/31/98.
-25-
<PAGE>
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1999 1998*
- --------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $
- --------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income
Net realized and unrealized
gain/(loss)
- --------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
Net realized gain
Capital
- --------------------------------------------------------------------------
Total distributions
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR
- --------------------------------------------------------------------------
TOTAL RETURN
- --------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
- --------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
- --------------------------------------------------------------------------
</TABLE>
*For the period from 2/27/98 (inception date) through 7/31/98.
- -26-
<PAGE>
FOR A CLASS L SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1999 1998*
- -------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $
- -------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income
Net realized and unrealized
gain/(loss)
- -------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS
- -------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
Net realized gain
Capital
- -------------------------------------------------------------------------
Total distributions
- -------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR
- -------------------------------------------------------------------------
TOTAL RETURN
- -------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
- -------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
- -------------------------------------------------------------------------
</TABLE>
*For the period from 2/27/98 (inception date) through 7/31/98.
-27-
<PAGE>
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
JULY 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998*
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income
Net realized and unrealized
gain/(loss)
- --------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
Net realized gain
Capital
- --------------------------------------------------------------------------------
Total distributions
- --------------------------------------------------------------------------------
NET ASSETS VALUE, END OF YEAR
- --------------------------------------------------------------------------------
TOTAL RETURN
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
- --------------------------------------------------------------------------------
</TABLE>
*For the period from 2/27/98 (inception date) through 7/31/98.
- -28-
<PAGE>
SALOMON SMITH BARNEY-SM-
A MEMBER OF CITIGROUP [SYMBOL]
TOTAL RETURN BOND FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE Our web site is located at www.smithbarney.com
You can also review 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
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
- -SM- Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
[FD00000 __/99]
PROSPECTUS SMITH BARNEY
MUTUAL FUNDS
-----------------------------------------------
November 30, 1999 HIGH INCOME FUND
Class Z Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
The Class Z shares described in this prospectus are offered exclusively for
sale to tax-exempt employee benefit and retirement plans of Salomon Smith
Barney Inc. or any of its affiliates.
<PAGE>
HIGH INCOME FUND
CONTENTS
Investments, risks and performance...............5
More on the fund's investments...................8
Management.......................................9
Buying, selling and redeeming
Class Z shares................................10
Share price.....................................11
Dividends, distributions and
taxes.........................................12
Financial highlights............................13
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.
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks high current income.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests primarily in high yield corporate bonds,
debentures and notes. These securities are commonly known as "junk bonds"
because they are rated in the lower rating categories of nationally and
internationally recognized rating agencies, or, if unrated, of similar credit
quality. The fund will not, however, invest more than 10% of its assets in
securities rated lower than B by both Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group.
The fund may invest in fixed income securities denominated either in U.S.
dollars or foreign currencies, and may invest up to 40% of its assets in fixed
income securities issued by foreign companies, including those in developing
countries. The fund's investments may be of any maturity, but under normal
conditions, the fund expects to maintain an average weighted maturity of between
five and 10 years. The fund may invest in zero coupon bonds, which trade at a
discount from face value becuase no interest is paid until maturity.
SELECTION PROCESS The manager attempts to minimize the risk of any individual
security by diversifying the fund's investments across a range of issues,
industries and maturity dates. In selecting high yield corporate fixed income
securities, the manager considers and compares the relative yields of various
types of obligations and employs a forward looking strategy seeking to identify
companies that exhibit favorable earnings prospects or demonstrate a potential
for higher ratings over time. The manager looks for:
- - Well-known companies with credit ratings within the upper- and
middle-rated tiers of the high-yield debt market
- - "Fallen angels" or companies that are repositioning in the marketplace
and that the manager believes are temporarily undervalued
- - Younger companies with smaller capitalizations that have exhibited
improving financial strength or improving credit ratings over time
The manager also employs an active sell strategy to dispose of securities that
have a rising risk of default due to material changes in management, operations,
earnings, or other internal or external factors.
INVESTMENTS, RISKS AND PERFORMANCE
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 issuer of a security owned by the fund defaults on its obligation to
pay principal and/or interest, or the security's credit rating is
downgraded. This risk is greater for high income bonds than for bonds of
higher credit quality
- - Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
<PAGE>
- - Foreign investments lose their value because of an increase in market
interest rates in one or more regions, adverse governmental action or,
political, economic or market instability in a foreign country or region
- - An unhedged currency in which a security is priced declines in value
relative to the U.S. dollar
- - The manager's judgment about the attractiveness, relative yield, value or
potential appreciation of a particular security proves to be incorrect
Below investment grade fixed income 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 liquid, and may be more difficult to value. Changes in economic
conditions or other circumstances are likely to weaken the capacity of issuers
of these securities to make principal and interest payments. In addition, zero
coupon bonds may be subject to greater fluctuations in market value than
securities that pay interest periodically.
Some foreign countries in which the fund invests have less liquid and more
volatile markets than in the U.S. In some foreign countries, there is also less
information available about foreign issuers and markets because of less rigorous
accounting and regulatory standards than in the U.S. Currency fluctuations could
erase investment gains or add to investment losses. The risk of investing in
foreign securities is greater in the case of less developed countries.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- - Are seeking to invest in fixed income securities for high current income
- - Are willing to accept the credit and interest rate risks of high yield
securities
<PAGE>
RISK/RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[RISK/RETURN BAR CHART]
<TABLE>
<CAPTION>
Calendar years ended
December 31
--------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Total Return for
Class Z shares 10.00 10.00 10.00 10.00 10.00
</TABLE>
QUARTERLY RETURNS (PAST 10 YEARS): Highest: xx% in ___ quarter 199X; Lowest: xx%
in ___ quarter 199X. Year to date: xx% through 9/30/99
RISK/RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of Class Z shares of the fund for the periods shown with
that of the Bear Stearns High-Yield Index, an unmanaged broad-based index of
high yield bonds with a remaining maturity of at least seven years, but less
than ten years. This table assumes reinvestment of distributions and dividends.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
CALENDAR YEARS ENDED DECEMBER 31, 1998
1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
CLASS Z N/A 11/06/92
Bear Stearns
High Yield Index n/a
</TABLE>
<PAGE>
FEES TABLE
This table sets forth the fees and expenses you will pay if you invest in Class
Z shares of the fund.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
<S> <C>
Management fee 0.70%
OTHER EXPENSES
----
Total annual fund operating expenses ---
</TABLE>
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
- - The fund's operating expenses remain the same
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class Z (with or without redemption) $ $ $ $
</TABLE>
<PAGE>
MORE ON THE FUND'S INVESTMENTS
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:
- - To hedge against the economic impact of adverse changes in the market value of
portfolio securities, because of changes in interest rates; or
- - As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities
markets 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.
EQUITY SECURITIES The fund may invest up to 20% of its assets in common stock or
other equity securities. In selecting equity securities for the fund's
portfolio, the manager considers both quantitative and qualitative factors,
including potential for growth and dividend yield.
CONVERTIBLE SECURITIES The fund may invest in fixed income securities that are
convertible into shares of common stock of their issuer. These securities share
investment characteristics of both fixed income and equity securities. The value
of a convertible security tends to vary more with fluctuations in the underlying
common stock and less with fluctuations in interest rates, compared with fixed
income securities that are not convertible.
DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager selects the
fund's investments and oversees its operations. The manager and Salomon Smith
Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
- -- and use diverse channels to make them available to consumer and corporate
customers around the world.
John C. Bianchi, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund since 1988.
MANAGEMENT FEE For its services, the manager received an advisory fee during the
fund's last fiscal year equal to 0.50% of the fund's average daily net assets.
In addition, the manager 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
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that 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.
<PAGE>
BUYING, SELLING AND EXCHANGING CLASS Z SHARES
Through a qualified You may buy, sell or exchange Class Z shares only
plan through a "qualified plan." A qualified plan
is a tax-exempt employee benefit or retirement plan of
Salomon Smith Barney, Inc. or one of its
affiliates.
There are no minimum investment requirements for Class Z
shares. However, the fund reserves the right to change
this policy at any time.
Buying Orders to buy Class Z shares must be made in accordance
with the terms of a qualified plan. If you are a
participant in a qualified plan, you may place an order
with your plan to buy Class Z shares at net asset value,
without any sales charge. Payment is due to Salomon
Smith Barney on settlement date, which is the third
business day after your order is accepted. If you make
payment prior to this date, you may designate a
temporary investment (such as a money market fund of the
Smith Barney funds) for payment until settlement date.
The fund reserves the right to reject any order to buy
shares and to suspend the offering of shares for a
period of time.
Selling Qualified plans may redeem their shares on any day on
which the fund calculates its net asset value. You
should consult the terms of your qualified plan for
special redemption provisions.
Exchanging You should consult your qualified plan for information
about available exchange options.
<PAGE>
SHARE PRICE
Qualified plans may buy, exchange or redeem Class Z shares of the fund at the
net asset value next determined after receipt of your request in good order. The
fund's net asset value is the value of its assets minus its liabilities. Net
asset value is calculated separately for each class of shares. The fund
calculates its net asset value every day the New York Stock Exchange is open.
The Exchange is closed on certain holidays listed in the Statement of Additional
Information. This calculation is done when regular trading closes on the
Exchange (normally 4:00 p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. The fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When reliable market prices are
not readily available, or when the value of a security has been materially
affected by events occurring after a foreign exchange closes, the fund may price
those securities at fair value. Fair value is determined in accordance with
procedures approved by the fund's board. A fund that uses fair value to price
securities may value those securities higher or lower than another fund that
uses market quotations to price the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when your
qualified plan 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 qualified plan before the New York Stock Exchange closes.
If the New York Stock Exchange closes early, you must place your order with your
qualified plan prior to the actual closing time. Otherwise, you will receive the
next business day's price.
Your qualified plan must transmit all orders to buy, exchange or redeem shares
to the fund's agent before the agent's close of business
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund generally pays dividends monthly and makes capital gain
distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be primarily from income. You do not pay a sales charge on
reinvested distributions 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 Class Z shares, exchanging Class Z shares and
receiving distributions (whether in cash or additional Class Z shares) are all
non-taxable events for purposes of federal income taxation.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide your qualified plan with your correct
taxpayer identification number and any required certifications, you may be
subject to back-up withholding of 31% of your distributions, dividends, and
redemption proceeds.
Because each shareholder's circumstances are different and special tax rules may
apply, you should consult with your tax adviser about your investment in the
fund.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of Class Z shares 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, is
included in the annual report (available upon request).
<PAGE>
For a Class Z share of capital stock outstanding throughout each year ended July
31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1999 1998(1) 1997(1) 1996 1995(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ $11.80 $10.99 $11.09 $11.16
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 1.04 1.12 1.11 1.11
Net realized and unrealized
gain/(loss) 0.01 0.80 (0.10) (0.03)
- ------------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.05 1.92 1.01 1.08
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.11) (1.11) (1.11) (1.08)
Capital -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (1.11) (1.11) (1.11) (1.15)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.74 $11.80 $10.99 $11.09
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 9.33% 18.29% 9.42% 10.55%
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000)'S $107 $104 $7,158 $9,917
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.85% 0.75% 0.77% 0.86%
Net investment income 8.82 9.88 9.98 10.28
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 102% 78% 72% 60%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SALOMON SMITH BARNEY(SM)
A MEMBER OF CITIGROUP [SYMBOL]
HIGH INCOME FUND
- -- an investment portfolio of Smith Barney Income Funds
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
STATEMENT OF ADDITIONAL INFORMATION The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
VISIT OUR WEB SITE Our web site is located at www.smithbarney.com
You can also review 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
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(SM) Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
[FD00000 __/99]
[LOGO SMITH BARNEY FUNDS]
PROSPECTUS
Balanced Fund
Class Z Shares
- ----------------------------------------
November 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 he contrary is a crime.
<PAGE>
Balanced Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 6
Management.................................................................. 7
Buying, selling and redeeming Class Z shares................................ 8
Share price................................................................. 9
Dividends, distributions and taxes.......................................... 10
Financial highlights........................................................ 11
</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>
Investments, Risks and Performance
Investment objective
The fund seeks current income and long-term capital appreciation.
Principal investment strategies
Key investments The fund invests in both equity and debt securities. The fund
normally maintains approximately 60% of its portfolio in equity securities and
40% in fixed income securities. These percentages, however, may vary based on
the manager's outlook.
Equity investments will primarily consist of common stocks, but also may
include other types of equity securities, such as preferred stocks, warrants
and securities convertible into common stocks. Fixed income securities will
include securities issued by the U.S. government (or its agencies and instru-
mentalities), corporate securities, mortgage-backed and asset-backed securi-
ties. Although there are no restrictions on the maturity of the fund's
individual securities, the fund normally expects to maintain an average portfo-
lio maturity for the fixed income portion of its portfolio of between five and
15 years. The fund may invest up to 25% of its total assets in fixed income
securities rated below investment grade by a nationally rated statistical rat-
ing organization.
Selection process
Equity Investments
The fund invests in equity securities in a broad range of companies, industries
and sectors. The manager attempts to identify securities with favorable valua-
tions relative to their growth characteristics. This strategy is commonly known
as "growth at a reasonable price" and offers style diversification within a
single mutual fund. Specifically, the manager looks for:
.Long-term value, based on expected growth of earnings or cash flow and yield
characteristics
.Short-term, or tactical, attractiveness, based on earnings cycle analysis
.Favorable earnings estimate revision
Fixed Income Investments
The fund invests in a broad range of fixed-income securities. In selecting
individual fixed income securities for the fund's portfolio, the manager pri-
marily focuses on the relative yields of securities and at various maturities.
The manager looks for:
.Favorable sector and maturity weightings based on interest rate outlook
.Stable or improving credit quality
.Low price relative to credit and interest rate characteristics
Balanced Fund
2
<PAGE>
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 equity
portion of the fund
.Companies in which the fund invests fail to meet earnings expectations, fall
out of favor with investors, or other events depress the prices of their
securities
.Interest rates increase, causing the prices of fixed income securities to
decline, thereby reducing the value of the fixed income portion of the fund
.The issuer of a fixed income security owned by the fund defaults on its obli-
gation to pay principal and/or interest or has its credit rating downgraded
.As interest rates decline, the issuers of fixed income securities held by the
fund may pay principal earlier than scheduled or exercise a right to call the
securities, forcing the fund to reinvest in lower yielding securities. This
is known as prepayment or call risk
.As interest rates rise above the coupon rate on one or more fixed income secu-
rities held by the fund, the issuers of these securities may extend the
effective maturity date, causing increased price sensitivity. This is known
as extension risk
.The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
Below investment grade bonds, 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>
Risk/return bar chart*
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 Z Shares
[GRAPH APPEARS HERE]
Quarterly returns (past 10 years):
Highest: xx% in quarter 199X; Lowest: xx% in quarter 199X. Year to date:
xx% through 9/30/99
Risk/return table*
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of Class Z shares of the fund for the periods shown
with that of the Standard & Poor's 500 Index ("S&P 500 Index"), an unmanaged
broad-based index of widely held common stocks, and the Lehman Brothers
Government/Corporate Bond Index ("Lehman Gov/Corp Index"), an unmanaged index
which tracks the performance of the overall bond market. This table assumes
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>
Z n/a 11/06/92
S&P 500 Index n/a
Lehman Gov/ Corp Index n/a
</TABLE>
*Prior to 1998, the fund was a utilities sector fund with different investment
goals, policies and strategies and different portfolio managers.
Balanced Fund
4
<PAGE>
Fees table
This table sets forth the fees and expenses you will pay if you invest in Class
Z shares of the fund.
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets)
<S> <C>
Management fee 0.65%
Other expenses
-----
Total annual fund operating expenses
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends
.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 Z (with or without redemption) $ $ $ $
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
More on the fund's investments
Derivative contracts The fund may, but need not, use derivative contracts, such
as options on securities, interest rate futures and options on interest rate
futures:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities, because of changes in interest rates or exchange rates;
or
.As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's, securities market or interest rate exposure. Therefore,
using derivatives can disproportionately increase losses and reduce opportuni-
ties for gains when interest rates, exchange rates or securities markets 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 pres-
ent 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. The fund may invest up to 10% of its assets in options for
hedging purposes.
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.
Balanced Fund
6
<PAGE>
Management
Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The manager and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range
of financial services--asset management, banking and consumer finance, credit
and charge cards, insurance, investments, investment banking and trading--and
use diverse channels to make them available to consumer and corporate customers
around the world.
Chad Graves is responsible for the day-to-day management of the equity portion
of the fund's portfolio, and James Conroy and John Bianchi are responsible for
the day-to-day management of the fixed income portion. Messrs. Graves, Conroy
and Bianchi are investment officers of the manager and vice presidents of Salo-
mon Smith Barney.
Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.45% of the fund's average daily net
assets. In addition, the manager 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.
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
that the efforts of the fund, which are limited to requesting and receiving
reports from its service providers, or the efforts or its service providers to
correct the problem will be successful.
Smith Barney Mutual Funds
7
<PAGE>
Buying, selling and exchanging Class Z shares
Through a You may buy, sell or exchange Class Z shares only through a
qualified "qualified plan." A qualified plan is a tax-exempt employee
plan benefit or retirement plan of Salomon Smith Barney, Inc. or
one of its affiliates.
There are no minimum investment requirements for Class Z
shares. However, the fund reserves the right to change this
policy at any time.
- --------------------------------------------------------------------------------
Buying Orders to buy Class Z shares must be made in accordance with
the terms of a qualified plan. If you are a participant in a
qualified plan, you may place an order with your plan to buy
Class Z shares at net asset value, without any sales charge.
Payment is due to Salomon Smith Barney on settlement date,
which is the third business day after your order is accepted.
If you make payment prior to this date, you may designate a
temporary investment (such as a money market fund of the
Smith Barney funds) for payment until settlement date. The
fund reserves the right to reject any order to buy shares and
to suspend the offering of shares for a period of time.
- --------------------------------------------------------------------------------
Selling Qualified plans may redeem their shares on any day on which
the fund calculates its net asset value. You should consult
the terms of your qualified plan for special redemption pro-
visions.
- --------------------------------------------------------------------------------
Exchanging You should consult your qualified plan for information about
available exchange options.
Balanced Fund
8
<PAGE>
Share price
Qualified plans may buy, exchange or redeem Class Z shares of the fund at the
net asset value next determined after receipt of your request in good order.
The fund's net asset value is the value of its assets minus its liabilities.
Net asset value is calculated separately for each class of shares. The fund
calculates its net asset value every day the New York Stock Exchange is open.
The Exchange is closed on certain holidays listed in the Statement of Addi-
tional Information. This calculation is done when regular trading closes on the
Exchange (normally 4:00 p.m., Eastern time).
The fund generally values its fund securities based on market prices or 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 are not
readily available, or when the value of a security has been materially affected
by events occurring after a foreign exchange closes, the fund may price those
securities at fair value. Fair value is determined in accordance with proce-
dures approved by the fund's board. A fund that uses fair value to price secu-
rities 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 your
qualified plan 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 qualified plan before the New York Stock Exchange closes.
If the New York Stock Exchange closes early, you must place your order with
your qualified plan prior to the actual closing time. Otherwise, you will
receive the next business day's price.
Your qualified plan 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
9
<PAGE>
Dividends, distributions and taxes
Dividends The fund generally pays dividends, if any, quarterly, and makes capi-
tal gain distributions, if any, once a year, typically in December. The fund
may pay additional distributions and dividends at other times if necessary for
the fund to avoid a federal tax. Capital gain distributions and dividends are
reinvested in additional fund shares of the same class you hold. The fund
expects distributions to be from both income and gains. You do not pay a sales
charge on reinvested distributions 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 distribu-
tion 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 distri-
bution or dividend is paid.
Taxes. [In general, redeeming Class Z shares, exchanging Class Z shares and
receiving distributions (whether in cash or additional Class Z shares) are all
non-taxable events for purposes of federal income taxation.]
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 your qualified plan with your
correct taxpayer identification number and any required certifications, you may
be subject to back-up withholding of 31% of your distributions, dividends, and
redemption proceeds.]
Because each shareholder's circumstances are different and special tax rules
may apply, you should consult with your tax adviser about your investment in
the fund.
Balanced Fund
10
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of Class Z shares 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, is
included in the annual report (available upon request).
For a Class Z share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998(/1/) 1997(/1/) 1996 1995(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $15.55 $14.52 $14.02 $13.28
- -------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.75 0.83 0.88 0.89
Net realized and unrealized
gain/(loss) 1.81 1.37 0.47 0.82
- -------------------------------------------------------------------------------
Total income from operations 2.56 2.20 1.35 1.71
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.71) (0.85) (0.85) (0.87)
Net realized gains (0.83) (0.32) -- (0.08)
Capital -- -- -- (0.02)
- -------------------------------------------------------------------------------
Total distributions (1.54) (1.17) (0.85) (0.97)
- -------------------------------------------------------------------------------
Net asset value, end of year $16.57 $15.55 $14.52 $14.02
- -------------------------------------------------------------------------------
Total return 17.08% 15.81% 9.62% 13.55%
- -------------------------------------------------------------------------------
Net assets, end of year
(millions)'s $ 12 $ 14 $ 15 $ 15
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.74% 0.73% 0.78% 0.81%
Net investment income 4.65 5.63 5.55 6.58
- -------------------------------------------------------------------------------
Portfolio turnover rate 110% 45% 58% 36%
- -------------------------------------------------------------------------------
</TABLE>
(/1/Per)share amounts calculated using the monthly average shares method.
(/2/On)November 7, 1994, the former Class C shares were renamed Class Z shares.
Smith Barney Mutual Funds
11
<PAGE>
The Class Z shares described in this prospectus are offered exclusively for
sale to tax-exempt employee benefit and retirement plans of Salomon Smith
Barney Inc. or any of its affiliates.
<PAGE>
[SALOMON SMITH BARNEY LOGO APPEARS HERE]
Balanced Fund
- --an investment portfolio of Smith Barney Income Funds
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)
[FD00000 /99]
[LOGO SMITH BARNEY FUNDS]
Diversified
Strategic Income
Fund
Class Z Shares
- ----------------------------------------
November 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 he contrary is a crime.
<PAGE>
Diversified Strategic Income Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 8
Management.................................................................. 9
Buying, selling and redeeming Class Z shares................................ 10
</TABLE>
<TABLE>
<S> <C>
Share price................................................................. 11
Dividends, distributions and taxes.......................................... 12
Financial highlights........................................................ 13
</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>
Investments, Risks and Performance
Investment objective
The fund seeks high current income.
Principal investment strategies
Key investments The fund invests primarily in three types of fixed income secu-
rities:
.U.S. government securities and U.S. government mortgage-related securities
.foreign government securities, including securities issued by supranational
organizations
.U.S. and foreign corporate debt securities
Allocation: The manager allocates and reallocates the fund's assets from time
to time among the types of fixed income securities described above based on its
analysis of economic and market conditions and the relative returns and risks
then represented by each type. The manager normally expects to maintain approx-
imately 50% of the fund's assets in government and mortgage-related securities,
25% in foreign government securities and 25% in corporate debt. However, these
percentages may vary significantly over time.
Maturity: The fund will invest primarily in intermediate-term securities. As a
result, the weighted average effective maturity of the fund's portfolio is nor-
mally expected to be between four and 10 years.
Credit quality: Up to 35% of the fund's assets may be invested in U.S. or for-
eign securities rated below investment grade or comparable unrated securities.
The portion of the fund's portfolio invested in corporate debt securities will
be primarily invested in below investment grade securities.
Selection process
Government and mortgage-related securities
In selecting government and mortgage-related securities, the manager focuses on
identifying undervalued sectors and securities. Specifically, the manager:
.Emphasizes those sectors and maturities that seem to be most undervalued or
appropriate based on the manager's economic and interest rate outlook
Diversified Strategic Income Fund
2
<PAGE>
.Monitors the yield spreads between U.S. Treasury and government agency or
instrumentality securities and purchases agency and instrumentality securi-
ties when their additional yield justifies their additional risk
.Uses research to uncover inefficient sectors of the government and mortgage
markets and adjusts portfolio positions to take advantage of new information
.Measures the potential impact of supply/demand imbalances, changes in the rel-
ative yields for securities with different maturities, and changing prepay-
ment patterns to identify individual securities that balance potential return
and risk
Foreign government securities
In selecting foreign government securities, the subadviser considers and com-
pares the relative yields of various foreign government obligations. The
subadviser diversifies this portion of the portfolio by spreading assets among
countries and regions. The subadviser also may attempt to preserve the U.S.
dollar value of securities by using currency derivatives to hedge foreign cur-
rency exposure. The subadviser looks for:
.Political and economic stability, and favorable inflation and government defi-
cit prospects
.Favorable yield and maturity
.Strong financial condition and high credit quality
.Low sensitivity to interest rate changes
Corporate debt securities
In selecting corporate debt securities, the manager considers and compares the
relative yields of various types of obligations and employs a forward looking
strategy seeking to identify companies that exhibit favorable earnings pros-
pects or demonstrate a potential for higher ratings over time. The manager
looks for:
."Fallen angels" or companies that are repositioning in the marketplace and
that the manager believes are temporarily undervalued
.Younger companies with smaller capitalizations that have exhibited improving
financial strength or improving credit ratings over time
The manager also employs an active sell strategy to dispose of securities that
have a rising risk of default due to material changes in management, opera-
tions, earnings, or other internal or external factors.
Smith Barney Mutual Funds
3
<PAGE>
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:
.Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
.As interest rates decline, the issuers of securities held by the fund may pay
principal earlier than scheduled or exercise a right to call the securities,
forcing the fund to reinvest in lower yielding securities. This is known as
prepayment or call risk
.As interest rates increase, slower than expected principal payments may extend
the average life of fixed income securities held by the fund, locking in
below market interest rates and reducing the value of these securities. This
is known as extension risk
.The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds, as described below
.Adverse governmental action or, political, economic or market instability
affects a foreign country or region
.An unhedged currency in which a security is priced declines in value relative
to the U.S. dollar
.The manager's or subadviser's judgment about the attractiveness, relative
yield, value or potential appreciation of a particular security, or the
proper allocation among types of investments, proves to be incorrect
Payments of principal and interest on mortgage pools issued by instrumentali-
ties of the U.S. government are not guaranteed by the U.S. government. Although
payments of principal and interest on mortgage pools issued by some U.S. agen-
cies are guaranteed, this guarantee does not apply to losses resulting from
declines in their market values.
Less developed foreign countries in which the fund may invest have less liquid
and more volatile markets than in the U.S. In some of these countries, there is
also less information available about issuers and markets because of less rig-
orous accounting and regulatory standards than in the U.S. Currency fluctua-
tions could erase investment gains or add to investment losses.
Below investment grade bonds, 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
Diversified Strategic Income Fund
4
<PAGE>
economic conditions or other circumstances are likely to weaken the capacity of
issuers of these securities to make principal and interest payments.
The fund may engage in active and frequent trading to achieve its principal
investment strategies. This may lead to the realization and distribution to
shareholders of higher capital gains, which would increase their tax liability.
Transaction costs of frequent trading may also result in increased fund
expenses.
Who may want to invest The fund may be an appropriate investment if you:
.Are seeking to invest in fixed income securities for high current income
.Are willing to accept the risks of mortgage-related securities, foreign secu-
rities and below investment grade bonds
Smith Barney Mutual Funds
5
<PAGE>
Risk/return bar chart
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 Z Shares
[GRAPH APPEARS HERE]
Quarterly returns:
Highest: xx% in quarter 199X; Lowest: xx% in quarter 199X. Year to date:
xx% through 9/30/99
Risk/return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of Class Z shares of the fund for the periods shown
with that of the Lehman Brothers Aggregate Bond Index, an unmanaged broad-based
index consisting of government, corporate, mortgage-related and asset-backed
fixed income securities. This table assumes 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>
Z n/a 11/06/92
Lehman Brothers
Aggregate Bond Index n/a
</TABLE>
Diversified Strategic Income Fund
6
<PAGE>
Fees table
This table sets forth the fees and expenses you will pay if you invest in Class
Z shares of the fund.
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets)
<S> <C>
Management fee 0.65%
Other expenses
-----
Total annual fund operating expenses
</TABLE>
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
.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 Z (with or without redemption) $ $ $ $
</TABLE>
Smith Barney Mutual Funds
7
<PAGE>
More on the fund's investments
Derivative contracts The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities, because of changes in interest rates or currency
exchange notes; or
.As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities mar-
kets 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.
Equity securities Although the fund invests primarily in fixed income securi-
ties, it may invest up to 20% of its assets in common stock and other equity-
related securities, including convertible securities, preferred stock, warrants
and rights. The portion of the fund's portfolio invested in corporate debt
securities normally includes non-convertible preferred stocks.
Zero coupon bonds Fixed income securities in which the fund may invest include
zero coupon bonds. These are bonds issued at a discount from face value because
no interest payments are made until maturity. Although these securities lock in
a rate of return to maturity, they may be subject to greater fluctuations in
market value than securities that pay interest periodically.
Forward roll transactions The fund may engage in forward roll transactions, in
which the fund sells a mortgage security, while simultaneously agreeing to
repurchase a similar security from the same party at a fixed price. These
transactions involve risks that the market value will decline below the repur-
chase price or that the other party will default.
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.
Diversified Strategic Income Fund
8
<PAGE>
Management
Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The fund's subadviser is Smith Barney
Global Capital Management, Inc., which is located at Cottons Centre, Hays Lane,
London SE1 2QT, United Kingdom. The subadviser is primarily responsible for
management of the fund's foreign component. The manager, subadviser and Salomon
Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a
broad range of financial services--asset management, banking and consumer
finance, credit and charge cards, insurance, investments, investment banking
and trading--and use diverse channels to make them available to consumer and
corporate customers around the world.
John C. Bianchi, James E. Conroy and Simon R. Hildreth are responsible for the
day-to-day management of the fund's portfolio. Messrs. Bianchi and Conroy, have
been investment officers of the manager and managing directors of Salomon Smith
Barney since the fund's inception in 1989. Mr. Hildreth has been an investment
officer of the manager and managing director of the subadviser since 1994.
Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.45% of the fund's average daily net
assets. In addition, the manager 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.
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
that 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>
Buying, selling and exchanging Class Z shares
Through a You may buy, sell or exchange Class Z shares only through a
qualified "qualified plan." A qualified plan is a tax-exempt employee
plan benefit or retirement plan of Salomon Smith Barney, Inc. or
one of its affiliates.
There are no minimum investment requirements for Class Z
shares. However, the fund reserves the right to change this
policy at any time.
- --------------------------------------------------------------------------------
Buying Orders to buy Class Z shares must be made in accordance with
the terms of a qualified plan. If you are a participant in a
qualified plan, you may place an order with your plan to buy
Class Z shares at net asset value, without any sales charge.
Payment is due to Salomon Smith Barney on settlement date,
which is the third business day after your order is accepted.
If you make payment prior to this date, you may designate a
temporary investment (such as a money market fund of the
Smith Barney funds) for payment until settlement date. The
fund reserves the right to reject any order to buy shares and
to suspend the offering of shares for a period of time.
- --------------------------------------------------------------------------------
Selling Qualified plans may redeem their shares on any day on which
the fund calculates its net asset value. You should consult
the terms of your qualified plan for special redemption pro-
visions.
- --------------------------------------------------------------------------------
Exchanging You should consult your qualified plan for information about
available exchange options.
Diversified Strategic Income Fund
10
<PAGE>
Share price
Qualified plans may buy, exchange or redeem Class Z shares of the fund at the
net asset value next determined after receipt of your request in good order.
The fund's net asset value is the value of its assets minus its liabilities.
Net asset value is calculated separately for each class of shares. The fund
calculates its net asset value every day the New York Stock Exchange is open.
The Exchange is closed on certain holidays listed in the Statement of Addi-
tional Information. This calculation is done when regular trading closes on the
Exchange (normally 4:00 p.m., Eastern time).
The fund generally values its fund securities based on market prices or 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 are not
readily available, or when the value of a security has been materially affected
by events occurring after a foreign exchange closes, the fund may price those
securities at fair value. Fair value is determined in accordance with proce-
dures approved by the fund's board. A fund that uses fair value to price secu-
rities 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 your
qualified plan 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 qualified plan before the New York Stock Exchange closes.
If the New York Stock Exchange closes early, you must place your order with
your qualified plan prior to the actual closing time. Otherwise, you will
receive the next business day's price.
Your qualified plan 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
11
<PAGE>
Dividends, distributions and taxes
Dividends The fund generally pays dividends monthly and makes capital gain dis-
tributions, if any, once a year, typically in December. The fund may pay addi-
tional distributions and dividends at other times if necessary for the fund to
avoid a federal tax. Capital gain distributions and dividends are reinvested in
additional fund shares of the same class you hold. The fund expects distribu-
tions to be primarily from income. You do not pay a sales charge on reinvested
distributions 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 Class Z shares, exchanging Class Z shares and
receiving distributions (whether in cash or additional Class Z shares) are all
non-taxable events for purposes of federal income taxation.]
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 your qualified plan with your
correct taxpayer identification number and any required certifications, you may
be subject to back-up withholding of 31% of your distributions, dividends, and
redemption proceeds.]
Because each shareholder's circumstances are different and special tax rules
may apply, you should consult with your tax adviser about your investment in
the fund.
Diversified Strategic Income Fund
12
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of Class Z shares of the fund 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 distribu-
tions. The information in the following tables was audited by KPMG LLP, inde-
pendent accountants, whose report, along with the fund's financial statements,
is included in the annual report (available upon request).
For a Class Z share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
1999 1998(/1/) 1997(/1/) 1996 1995(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ $8.01 $7.82 $7.85 $7.76
- -------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(/2/) 0.55 0.65 0.64 0.84
Net realized and unrealized
gain/(loss) 0.05 0.23 0.02 (0.06)
- -------------------------------------------------------------------------------
Total income from operations 0.60 0.88 0.66 0.78
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.69) (0.63) (0.49)
Net realized gain (0.05) -- -- --
Capital -- -- (0.05) (0.20)
- -------------------------------------------------------------------------------
Total distributions (0.65) (0.69) (0.69) (0.69)
- -------------------------------------------------------------------------------
Net asset value, end of year $7.96 $8.01 $7.82 $7.85
- -------------------------------------------------------------------------------
Total return 7.78% 11.69% 8.72% 10.94%
- -------------------------------------------------------------------------------
Net assets, end of year (000)'s $21,670 $20,397 $16,270 $14,361
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 0.74% 0.69% 0.75% 0.75%
Net investment income 6.85 8.08 8.30 8.30
- -------------------------------------------------------------------------------
Portfolio turnover rate 128% 85% 83% 83%
- -------------------------------------------------------------------------------
</TABLE>
(/1/Per)share amounts calculated using the monthly average shares method.
(/2/On)November 7, 1994, the former Class C shares were renamed Class Z shares.
Smith Barney Mutual Funds
13
<PAGE>
The Class Z shares described in this prospectus are offered exclusively for
sale to tax-exempt employee benefit and retirement plans of Salomon Smith
Barney Inc. or any of its affiliates.
<PAGE>
[SALOMON SMITH BARNEY LOGO APPEARS HERE]
Diversified Strategic Income Fund
- -- an investment portfolio of Smith Barney Income Funds
Shareholder reports Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's perfor-
mance.
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 informa- tion The statement of additional information
provides more detailed information about the fund and is incorporated by ref-
erence 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 Salo-
mon 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 Commis-
sion'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 Commission, Washington, D.C. 20549-6009. Information about the public ref-
erence 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 distribu-
tor is offering to sell shares of the fund to any person to whom the fund may
not lawfully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04254)
Part B-Statement of Additional Information
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information November 29, 1999
This statement of additional information expands upon and supplements the
information contained in the current prospectuses of Smith Barney Income
Funds (the "trust"), relating to seven investment funds offered by the
trust: Smith Barney Balanced Fund (the "Balanced Fund") (formerly Smith
Barney Utilities Fund), Smith Barney Convertible Fund (the "Convertible
Fund"), Smith Barney Diversified Strategic Income Fund (the "Diversified
Strategic Income Fund"), Smith Barney Exchange Reserve Fund (the "Exchange
Reserve Fund"), Smith Barney High Income Fund (the "High Income Fund"),
Smith Barney Municipal High Income Fund (the "Municipal High Income Fund")
and Smith Barney Total Return Bond Fund ("Total Return Bond Fund"), each
dated November 29, 1999, as amended or supplemented from time to time, and
should be read in conjunction with these prospectuses. The funds'
prospectuses may be obtained from any Salomon Smith Barney Financial
Consultant or by writing or calling the trust at the address or telephone
number set forth above. This statement of additional information, although
not in itself a prospectus, is incorporated by reference into the funds'
prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
funds' prospectuses and this statement of additional information, except
where shown below:
Management of the Trust and the Funds [ ]
Investment Objectives and Policies. [ ]
Risk Factors [ ]
Purchase of Shares [ ]
Redemption of Shares [ ]
Distributor.. [ ]
Valuation of Shares [ ]
Exchange Privilege [ ]
Performance Data (See in the prospectuses "Performance" or "Yield
Information") [ ]
Taxes (See in the prospectuses "Dividends, Distributions and Taxes") [ ]
Additional Information [ ]
Voting Rights [ ]
Financial Statements [ ]
Appendix A-1
MANAGEMENT OF THE TRUST AND THE FUNDS
The executive officers of the trust are employees of certain of the
organizations that provide services to the trust. These organizations are
the following:
Name
Service
CFBDS, Inc. ("CFBDS")
Distributor
SSB Citi Fund Management LLC
(formerly known as SSB Citi Fund
Management Inc.) ("SSB Citi" or
the "manager")
Investment adviser and administrator
to the funds
Smith Barney Global Capital
Management Inc. ("Global Capital
Management")
Sub-investment adviser to Diversified
Strategic Income Fund
Salomon Brothers Asset Management
("SBAM")
Sub-investment adviser to Convertible
Fund.
PNC Bank, National Association
("PNC Bank")
Custodian to Convertible Fund,
Exchange Reserve Fund, High Income
Fund, Municipal High Income Fund,
Total Return Bond Fund and Balanced
Fund
Chase Manhattan Bank ("Chase")
Custodian to Diversified Strategic
Income Fund
First Data Investors Services
Group, Inc. ("First Data")
Transfer Agent
These organizations and the functions they perform for the trust are
discussed in the funds' prospectuses and in this statement of additional
information.
Trustees and Executive Officers of the Trust
The trustees and executive officers of the trust, together with information
as to their principal business occupations during the past five years, are
shown below. The executive officers of the trust are employees of
organizations that provide services to the funds. Each trustee who is an
"interested person" of the trust, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), is indicated by an asterisk.
Lee Abraham, Trustee (Age 72). Retired; Director or trustee of 11
investment companies associated with Citigroup; 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 69). Consultant; Director or trustee of 18
investment companies associated with Citigroup; 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 58). Head of School, The New Atlanta
Jewish Community High School, Atlanta Georgia; Director or trustee of 11
investment companies associated with Citigroup; prior to July 1, 1994,
Headmaster, Lawrence Country Day School-Woodmere Academy, Woodmere, New
York; prior to July 1, 1990, Headmaster of Woodmere Academy. His address is
58 Ivy Chase, Atlanta, GA 30342.
Jane Dasher, Director (Age 49). Investment Officer of Korsant Partners, a
family investment company; Director or trustee of 11 investment companies
associated with Citigroup. Prior to 1997, an Independent Financial
Consultant; From 1975 to 1987 held various positions with Philip Morris
Companies, Inc. including Director of Financial Services, Treasurers
Department; Her address is 283 Greenwich Avenue, Greenwich Connecticut
06830.
Donald R. Foley, Director (Age 76). Retired; Director or trustee of 12
investment companies associated with Citigroup. Formerly Vice President of
Edwin Bird Wilson, Incorporated (an advertising agency). His address is
3668 Freshwater Drive, Jupiter, Florida 33477.
Paul Hardin, Director (Age 67). Professor of Law at University of North
Carolina at Chapel Hill; Director of The Summit Bancorporation; Director
or trustee of 14 investment companies associated with Citigroup. Formerly,
Chancellor of the University of North Carolina at Chapel Hill. His address
is 12083 Morehead, Chapel Hill, North Carolina 27514.
Roderick C. Rasmussen, Director (Age 72). Investment Counselor; Director
or trustee of 12 investment companies associated with Citigroup.Formerly
Vice President of Dresdner and Company Inc. (investment counselors). ; His
address is 9 Cadence Court, Morristown, New Jersey 07960;
John P. Toolan, Director (Age 68). Retired; Director or trustee of 12
investment companies associated with Citigroup. Trustee of John Hancock
Funds; Formerly, Director and Chairman of Salomon 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. His address is 13 Chadwell Place, Morristown,
New Jersey 07960.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 66).
Managing Director of Salomon Smith Barney Inc. ("Salomon Smith Barney")
and Chairman of the Board of Smith Barney Strategy Advisers Inc.; and
President of SSB Citi and Travelers Investment Adviser, Inc. ("TIA"). Mr.
McLendon is Chairman or Co-Chairman of the Board and Director of 64
investment companies associated with Citigroup Inc. ("Citigroup") His
address is 388 Greenwich Street, New York, New York 10013.
John C. Bianchi, Vice President and Investment Officer (Age 44). Managing
Director of Salomon Smith Barney; Investment Officer of six Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York
10013.
James E. Conroy, Vice President and Investment Officer (Age 48). Managing
Director of Salomon Smith Barney. Investment Officer of four Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York
10013.
Joseph P. Deane, Vice President and Investment Officer (Age 52). Managing
Director of Salomon Smith Barney; Investment Officer of nine Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York
10013.
Simon R. Hildreth, Vice President and Investment Officer (Age 47).
Managing Director of Salomon Smith Barney, member of the Investment Policy
of Smith Barney Global Capital Management Inc.; Mr. Hildreth is Vice
President and Investment Officer of three Smith Barney Mutual Funds. Prior
to 1994, a Director of Mercury Asset Management Ltd., a fund manager
located in the United Kingdom. His address is 10 Piccadilly, London, WIV
9LA, UK.
Charles P. Graves, III, Vice President and Investment Officer (Age 37).
Managing Director of Salomon Smith Barney. His address is 388 Greenwich
Street, New York, New York 10013.
Robert E. Swab, Investment Officer (Age 44). Vice President of Salomon
Smith Barney. His address is 388 Greenwich Street, New York, New York
10013.
Phyllis M. Zahorodny, Vice President and Investment Officer (Age 41).
Managing Director of Salomon Smith Barney. Investment Officer of four Smith
Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 42). Managing
Director of Salomon Smith Barney; Director and Senior Vice President of
SSB Citi and TIA. Mr. Daidone serves as Senior Vice President and Treasurer
or Executive Vice President and Treasurer of 59 investment companies
associated with Citigroup. His address is 388 Greenwich Street, New York,
New York 10013.
Paul Brook, Controller (Age 45). Director of Salomon Smith Barney; Mr.
Brook serves as Controller or Assistant Secretary of 43 investment
companies associated with Citigroup. from 1997-1998 Managing Director of
AMT Capital Services Inc.; prior to 1997 Partner with Ernst & Young LLP.
Christina T. Sydor, Secretary (Age 48). Managing Director of Salomon Smith
Barney; General Counsel and Secretary of SSB Citi and TIA. Ms. Sydor serves as
Secretary or Executive Vice President and General Counsel of 59 investment
companies associated with Citigroup. Her address is 388 Greenwich Street,
New York, New York 10013.
Each trustee also serves as a director, trustee and/or general partner of
certain other Smith Barney Mutual Funds. Global Capital Management and SSB Citi
are "affiliated persons" of the trust as defined in the 1940 Act by virtue
of their positions as investment advisers to the funds. As of November __,
1999, the trustees and officers of the funds, as a group, owned less than
1% of the outstanding shares of beneficial interest of each fund.
No officer, director or employee of Salomon Smith Barney or any Salomon
Smith Barney parent or subsidiary receives any compensation from the trust
for serving as an officer or trustee of the trust. The trust pays each
trustee who is not an officer, director or employee of Salomon Smith Barney
or any of its affiliates a fee of $17,000 per year plus $3,250 per meeting
attended, and reimburses them for travel and out-of-pocket expenses. For
the fiscal year ended July 31, 1999, such travel and out-of-pocket expenses
totaled $_________.
For the fiscal year ended July 31, 1999 and the calendar year ended
December 31, 1998, the trustees of the trust were paid the following
compensation:
Trustee(*)
Aggregate
Compensation
from the Funds
for the Fiscal
Year ended
July 31, 1999
Total
Pension or
Retirement
Benefits
Accrued
from the
Funds
Aggregate
Compensation
from the Funds
and the Fund
Complex for the
Year Ended
December 31,
1998
Number of
Funds for
Which Person
Served
Within Fund
Complex
Lee Abraham
$
$0
$
11
Allan J.
Bloostein
0
18
Richard E.
Hanson, Jr.
0
11
Jane Dasher++
0
11
Donald R.
Foley**
0
12
Paul Hardin
0
14
Heath B.
McLendon*
0
0
0
64
Roderick C.
Rasmussen
0
12
John P. Toolan**
0
12
Investment Adviser, Sub-Investment Advisers and Administrator
SSB Citi serves as investment adviser to one or more funds pursuant to a
separate written agreement with the relevant fund (an "advisory
agreement"). SSB Citi is a wholly owned subsidiary of Salomon Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Citigroup. The advisory agreements were most recently approved by the board
of trustees, including a majority of the trustees who are not "interested
persons" of the trust or the Advisers ("Independent Trustees"), on June 16,
1999. SSB Citi also serves as administrator (the "Administrator") to each fund
pursuant to a separate written agreement dated May 4, 1994 (the
"administration agreement") which was most recently approved by the board
on June 16, 1999. Global Capital Management serves as a sub-investment
adviser to Diversified Strategic Income Fund, pursuant to a written
agreement dated March 21, 1994, respectively. SBAM serves as sub-investment
adviser to Convertible Fund pursuant to a written agreement dated
______________. Each of these agreements were most recently approved by
the fund's board of trustees, including a majority of the Independent
Trustees, on ________, 1999.
Certain of the services provided to the trust by SSB Citi and the sub-
investment advisers are described in the prospectuses under "Management of
the Trust and the Fund." SSB Citi, each sub-investment adviser, and the
Administrator pays the salaries of all officers and employees who are
employed by both it and the trust, and maintains office facilities for the
trust. In addition to those services, SSB Citi furnishes the trust with
statistical and research data, clerical help and accounting, data
processing, bookkeeping, internal auditing and legal services and certain
other services required by the trust, prepares reports to the funds'
shareholders and prepares tax returns, reports to and filings with the
Securities and Exchange Commission (the "SEC") and state Blue Sky
authorities. SSB Citi and the sub-investment advisers bear all expenses in
connection with the performance of their services.
As compensation for investment advisory services, each fund pays SSB Citi a fee
computed daily and paid monthly at the following annual rates:
Fund
Investment Advisory
Fee As a Percentage
of Average Net
Assets
Convertible Fund
0.50%
Diversified Strategic Income Fund
0.45%
Exchange Reserve Fund
0.30%
High Income Fund
0.50%
Municipal High Income Fund
0.40%
Total Return Bond Fund
0.65%
Balanced Fund
0.45%
For the periods below, the funds paid investment advisory fees to SSB Citi as
follows:
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
489,663
$
665,663
Diversified Strategic
Income Fund
12,546,98
0
13,233,25
8
Exchange Reserve Fund
442,557
326,309
High Income Fund
5,646,405
7,363,535
Municipal High Income
Fund
3,395,338
3,103,442
Total Return Bond Fund
(1)
N/A
378,792
Balanced Fund
6,431,624
5,097,517
____________________________
(1) Total Return Bond Fund waived $__________ in management fees for the
fiscal year ended July 31, 1999. The administrative fees have been
included in the total for management fees.
As compensation for administrative services, each fund pays the
Administrator a fee computed daily and paid monthly at the annual rate of
0.20% of the fund's average daily net assets. For the periods shown below,
the funds paid administrative fees to SSB Citi:
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$195,865
$266,265
Diversified Strategic
Income Fund
5,576,436
5,881,448
Exchange Reserve Fund
295,038
217,539
High Income Fund
2,258,562
2,945,414
Municipal High Income
Fund
1,697,669
1,551,721
Total Return Bond Fund*
N/A
N/A
Balanced Fund
2,858,500
2,265,563
___________________________
*The administrative fees have been included in the total for management
fees.
For the fiscal years ended July 31, 1997, 1998 and 1999, Diversified
Strategic Income Fund paid Global Capital Management sub-investment
advisory fees of $2,788,218, $2,940,724 and ________, respectively. [For
the fiscal year ended July 31, 1999, Convertible Fund paid SBAM sub-
investment advisory fees of $____________. Prior to __________, 1999,
Convertible Fund did not utilize a sub-investment adviser.]
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 SSB Citi; 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, 757 Third Avenue, New York, New York 10017 has been selected as
the trust's independent auditor to examine and report on the trust's
financial statements and highlights for the fiscal year ending July 31,
2000.
INVESTMENT OBJECTIVES AND POLICIES
The prospectuses discuss the investment objectives of the funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other
instruments in which the funds may invest, the investment policies and
portfolio strategies that the funds may utilize and certain risks attendant
to such investments, policies and strategies.
Balanced Fund
The fund is managed as a balanced fund and invests in equity and debt
securities. The fund will maintain a target asset allocation of
approximately 60% of its total assets in equity securities and
approximately 40% of its total assets in fixed-income securities. The
fund has the additional flexibility to invest a minimum of 50% and a
maximum of 70% of its total assets in equity securities and a minimum of
30% and a maximum of 50% of its total assets in fixed-income securities.
The fund may also invest up to 25% of its total assets in fixed-income
securities rated less than investment grade by a nationally recognized
statistical rating organization ("NRSRO") such as Moody's Investors
Services, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P").
Such securities are commonly referred to as "junk bonds." There are no
maturity restrictions on the fixed-income securities in which the fund
invests. Under normal market conditions the weighted average portfolio
maturity for the fixed-income portfolio will be in the 5 to 15 year range.
The fund may also invest up to 25% of its total assets in fixed-income
securities rated below investment grade by any NRSRO such as Moody's and
S&P. Such securities are commonly referred to as "junk bonds." The fund
may also hold, from time to time, securities rated Caa by Moody's or CCC
by S&P or, if unrated or rated by other NRSROs, securities of comparable
quality as determined by SSB Citi. While this portion of the securities held
by the fund are expected to provide greater income and possibly,
opportunity for greater gain than investments in more highly rated
securities, they may be subject to greater risk of loss of income and
principal and are more speculative in nature.
Convertible Fund
Under normal circumstances, the fund will invest at least 65% of its
assets in convertible securities. The fund is not required to sell
securities to conform to this 65% limitation and may retain on a temporary
basis securities received upon conversion of convertible securities or
upon exercise of warrants or call options that are components of synthetic
convertible securities to permit their orderly disposition, to establish
long-term holding periods for tax purposes or for other reasons. The fund
will not invest in fixed-income securities that are rated lower than B by
Moody's or S&P, or having an equivalent rating by any NRSRO or, if
unrated, deemed by SSB Citi to be comparable to securities rated lower than B.
The fund may invest up to 35% of its assets in synthetic convertible
securities and in equity and debt securities that are not convertible into
common stock and, for temporary defensive purposes when deemed appropriate
by the fund's investment adviser in light of current market conditions,
may invest in these securities without limitation. In seeking to achieve
its investment objective, the fund may write covered call options, lend
portfolio securities and enter into short sales "against the box." The
fund may utilize up to 10% of its assets to purchase put options on
securities for hedging purposes and may invest up to 10% of its assets in
foreign securities. The fund may utilize up to 50% of its assets as
collateral for short sales against the box.
Diversified Strategic Income Fund
At any given time, the fund may be entirely or only partially invested in
a particular type of fixed-income security. Under normal conditions, at
least 65% of the fund's assets will be invested in fixed-income
securities, which for this purpose will include non-convertible preferred
stocks. Up to 20% of the fund's assets may be invested in common stock or
other equity-related securities, including convertible securities,
preferred stock, warrants and rights.
The fund may invest up to 35% of its assets in corporate fixed income
securities of domestic issuers and foreign issuers of developed countries
rated Ba or lower by Moody's or BB or lower by S&P or an equivalent rating
by any other NRSRO or in nonrated securities deemed by SSB Citi or Global
Capital Management to be of comparable quality. The fund may invest in
fixed income securities rated as low as Caa by Moody's or CCC by S&P or an
equivalent rating by any other NRSRO.
Corporate fixed-income securities of foreign issuers in which the fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United
States. Foreign government securities in which the fund may invest
consist of fixed-income securities issued by foreign governments. In
general, the fund may invest in debt securities issued by foreign
governments or any of their political subdivisions that are considered
stable by Global Capital Management. Up to 5% of the fund's assets,
however, may be invested in foreign securities issued by countries with
developing economies.
The fund may invest in fixed-income securities issued by supranational
organizations, which are entities designated or supported by a government
or governmental entity to promote economic development, and include, among
others, the Asian Development Bank, the European Coal and Steel Community,
the European Economic Community and the World Bank. These organizations
have no taxing authority and are dependent upon their members for payments
of interest and principal. Moreover, the lending activities of
supranational entities are limited to a percentage of their total capital
(including "callable capital" contributed by members at an entity's call),
reserves and net income.
Up to 20% of the fund's assets may be invested in cash and money market
instruments at any time. The Fund will invest in obligations of a foreign
bank or foreign branch of a domestic bank only if the manager determines
that the obligations present minimum credit risks. These obligations may
be traded in the United States or outside the United States, but will be
denominated in U.S. dollars.
Exchange Reserve Fund
U.S. Government Securities in which the fund may invest include: direct
obligations of the United States Treasury such as Treasury Bills, Treasury
Notes and Treasury Bonds; obligations which are supported by the full
faith and credit of the United States such as Government National Mortgage
Association pass-through certificates; obligations which are supported by
the right of the issuer to borrow from the United States Treasury, such as
securities of Federal Home Loan Banks; and obligations which are supported
by the credit of the instrumentality, such as Federal National Mortgage
Association and Federal Home Loan Mortgage Association bonds. Because the
U. S. government is not obligated by law to provide support for an
instrumentality that it sponsors, the fund will invest in obligations
issued by such an instrumentality only when the fund's investment adviser
determines that the credit risk with respect to the instrumentality does
not make its securities unsuitable for investment by the fund.
Certificates of Deposit, Time Deposits and Bankers' Acceptances in which
the fund may invest generally are limited to those instruments issued by
domestic and foreign banks, including branches of such banks, savings and
loan associations and other banking institutions having total assets in
excess of $1 billion. Certificates of deposit ("CDs") are short-term
negotiable obligations of commercial banks; time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for specified
periods of time at stated interest rates; and bankers' acceptances are
time drafts drawn on commercial banks by borrowers usually in connection
with international transactions. The fund may invest in U.S.
dollar-denominated bank obligations, such as CDs, bankers' acceptances and
TDs, including instruments issued or supported by the credit of domestic
or foreign banks or savings institutions having total assets at the time
of purchase in excess of $1 billion. The fund generally will invest at
least 25% of its assets in these securities. The fund will invest in an
obligation of a foreign bank or foreign branch of a domestic bank only if
the fund's investment adviser deems the obligation to present minimal
credit risks. Nevertheless, this kind of obligation entails risks that
are different from those of investments in domestic obligations of
domestic banks due to differences in political, regulatory and economic
systems and conditions. The fund will not purchase TDs maturing in more
than six months and will limit to no more than 10% of its assets its
investment in TDs maturing from two business days through six months.
Commercial Paper in which the fund may invest is limited to debt
obligations of domestic and foreign issuers that at the time of purchase
are Eligible Securities (as defined below under "Fund Quality and
Diversification") that are (a) rated by at least one NRSRO in the highest
rating category for short-term debt securities or (b) comparable unrated
securities. The fund also may invest in variable rate master demand
notes, which are unsecured demand notes typically purchased directly from
large corporate issuers providing for variable amounts of principal
indebtedness and periodic adjustments in the interest rate according to
the terms of the instrument. Demand notes normally are not traded in a
secondary market. However, the fund may demand payment of principal and
accrued interest in full at any time without penalty. In addition, while
demand notes generally are not rated, their issuers must satisfy the same
criteria as those set forth above for issuers of commercial paper. SSB Citi
will consider the earning power, cash flow and other liquidity ratios of
issuers of demand notes and continually will monitor their financial
ability to meet payment on demand.
The fund invests only in securities which are purchased with and payable
in U.S. dollars and which have (or, pursuant to regulations adopted by the
SEC, will be deemed to have) remaining maturities of thirteen months or
less at the date of purchase by the fund. For this purpose, variable rate
master demand notes (as described above under "Commercial Paper"), which
are payable on demand or, under certain conditions, at specified periodic
intervals not exceeding thirteen months, in either case on not more than
30 days' notice, win be deemed to have remaining maturities of thirteen
months or less. The fund maintains a dollar-weighted average portfolio
maturity of 90 days or less. The fund follows these policies to maintain
a constant net asset value of $1.00 per share, although there is no
assurance that it can do so on a continuing basis.
The fund will limit its investments to securities that the board of
trustees determines present minimal credit risks and which are "Eligible
Securities" at the time of acquisition by the fund. The term Eligible
Securities includes securities rated by the "Requisite NRSROs" in one of
the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt
securities and comparable unrated securities. "Requisite NRSROs" means
(a) any two NRSROs that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one
NRSRO has issued such a rating at the time that the fund acquires the
security. If the fund acquires securities that are unrated or that have
been rated by a single NRSRO, the acquisition must be approved or ratified
by the board of trustees. The NRSROs currently designated as such by the
SEC are S&P, Moody's, Thomson BankWatch, Fitch IBCA, Inc. and Duff &
Phelps Credit Rating Co. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to this Statement of Additional
Information.
The fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In
addition, the fund may not invest more than 5% of its total assets in
Eligible Securities that have not received the highest rating from the
Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than 1% of its total assets in the
Second Tier Securities of any one issuer. The fund may invest more than
5% (but no more than 25%) of the then-current value of the fund's total
assets in the securities of a single issuer for a period of up to three
business days, provided that (a) the securities are rated by the Requisite
NRSROs in the highest short-term rating category, are securities of
issuers that have received such rating with respect to other short-term
debt securities or are comparable unrated securities, and (b) the fund
does not make more than one such investment at any one time.
The fund will concentrate its investments in the banking industry except
during temporary defensive periods. Up to 25% of the assets of the fund
may be invested at any time in the obligations of issuers conducting their
principal business activities in any industry other than banking. The
fund may not acquire more than 10% of the voting or any other class of
securities of any one issuer, except that U.S. government securities may
be purchased without regard to these limits.
High Income Fund
The fund will seek high current income by investing, under normal
circumstances, at least 65% of its assets in high-yielding corporate
bonds, debentures and notes denominated in U.S. dollars or foreign
currencies. Up to 40% of the fund's assets may be invested in
fixed-income obligations of foreign issuers, and up to 20% of its assets
may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants
and rights. Securities purchased by the fund generally will be rated in
the lower rating categories, as low as Caa by Moody's or D by S&P or an
equivalent rating by any NRSRO, or in unrated securities that SSB Citi deems
of comparable quality. However, the fund will not purchase securities
rated lower than B by both Moody's and S&P unless, immediately after such
purchase, no more than 10% of its total assets are invested in such
securities. The fund may hold securities with higher ratings when the
yield differential between low-rated and higher-rated securities narrows
and the risk of loss may be reduced substantially with only a relatively
small reduction in yield.
The fund may also invest in zero coupon bonds and payment-in-kind bonds.
The fund also may invest in higher-rated securities when SSB Citi believes
that a more defensive investment strategy is appropriate in light of
market or economic conditions. The fund also may lend its portfolio
securities, purchase or sell securities on a when-issued or
delayed-delivery basis and write covered call options on securities. In
order to mitigate the effects of uncertainty in future exchange rates, the
fund may engage in currency exchange transactions and purchase options on
foreign currencies. The fund also may hedge against the effects of
changes in the value of its investments by purchasing put and call options
on interest rate futures contracts.
Corporate securities in which the fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as
bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock. The fund's investments in each of
equipment leases or equipment trust certificates will not exceed 5% of its
assets.
Certain of the corporate fixed-income securities in which the fund may
invest may involve equity characteristics. The fund may, for example,
invest in warrants for the acquisition of stock of the same or of a
different issuer or in corporate fixed income securities that have
conversion or exchange rights permitting the holder to convert or exchange
the securities at a stated price within a specified period of time into a
specified number of shares of common stock. In addition, the fund may
invest in participations that are based on revenues, sales or profits of
an issuer or in common stock offered as a unit with corporate fixed-income
securities.
Municipal High Income Fund
Under normal market conditions, the fund will invest at least 80% of its
net assets in (a) "Municipal Bonds," which generally are intermediate- and
long-term debt obligations issued by or on behalf of states, territories
and possessions of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities and (b) municipal leases. Under normal
market conditions, the fund's assets will be invested primarily in
Municipal Bonds and municipal leases (collectively, "Municipal
Securities") rated A, Baa or Ba by Moody's, or A, BBB or BB by S&P, or
have an equivalent rating by any nationally recognized statistical rating
organization, or obligations determined by SSB Citi to be equivalent, or in
unrated Municipal Securities that are deemed to be of comparable quality
by SSB Citi. Up to 50% of the fund's assets may be invested in Municipal
Securities rated Ba or below by Moody's or BB or below by S&P or, if
unrated, judged by SSB Citi, to be of comparable quality.
The fund may invest without limit in municipal leases, which generally are
participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Municipal leases may take the form of a lease or
an installment purchase contract issued by state and local government
authorities to obtain funds to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might
prove difficult. There is no limitation on the percentage of the fund's
assets that may be invested in municipal lease obligations. In evaluating
municipal lease obligations, SSB Citi will consider such factors as it deems
appropriate, which may include: (a) whether the lease can be canceled; (b)
the ability of the lease obligee to direct the sale of the underlying
assets; (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding
for the leased property in the event such property is no longer considered
essential by the municipality; (e) the legal recourse of the lease obligee
in the event of such a failure-to appropriate funding; (f) whether the
security is backed by a credit enhancement such as insurance; and (g) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services rather than those covered by the lease
obligation.
Under normal circumstances, the fund may invest in "private activity
bonds." Interest income on certain types of private activity bonds issued
after August 7, 1986 to finance nongovernmental activities is a specific
tax preference item for purposes of Federal individual and corporate
alterative minimum taxes. Individual and corporate shareholders may be
subject to a Federal alternative minimum tax to the extent that the fund's
dividends are derived from interest on these bonds. These private
activity bonds are included in the term "Municipal Securities" for
purposes of determining compliance with the 80% test described above.
Dividends derived from interest income on all Municipal Securities are a
component of the "adjusted current earnings" item for purposes of the
Federal corporate alternative minimum tax.
The fund may invest in short-term obligations ("Temporary Investments"),
some of which may not be tax-exempt. Included among the Temporary
Investments are tax-exempt notes rated within the four highest grades by a
NRSRO, including Moody's or S&P; tax-exempt commercial paper rated no
lower than A-2 by S&P or Prime-2 by Moody's; and taxable money market
instruments. At no time will more than 20% of the fund's assets be
invested in Temporary Investments unless SSB Citi temporarily has adopted a
defensive investment posture. In addition, the fund may enter into
municipal bond index futures contracts and options on interest rate
futures contracts for hedging purposes. The fund also may acquire
variable rate demand notes, purchase securities on a when-issued basis and
enter into stand-by commitments with respect to portfolio securities.
Total Return Bond Fund
At any given time, the fund may be entirely or partially invested in a
particular type of fixed-income security. Under normal conditions, at
least 65% of the fund's assets will be invested in fixed-income
securities. The "total return" sought by the fund will consist of
interest and dividends from underlying securities, capital appreciation
reflected in unrealized increases in value of fund securities (realized by
the shareholder only upon selling shares), or realized from the purchase
and sale of securities and the use of futures and options. The change in
market value of fixed-income securities (and therefore their capital
appreciation) is largely a function of changes in the current level of
interest rates.
Under normal market conditions, the fund may hold up to 20% of its total
assets in cash or money market instruments, including taxable money market
instruments.
Other Investment Policies
U.S. Government Securities (All funds). United States government securities
include debt obligations of varying maturities issued or guaranteed by the
United States government or its agencies or instrumentalities ("U.S.
government securities"). U.S. government securities include not only direct
obligations of the United States Treasury, but also securities issued or
guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Student Loan Marketing Association,
International Bank for Reconstruction and Development, and Resolution Trust
Corporation. Certain U.S. government securities, such as those issued or
guaranteed by GNMA, FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), are mortgage-related securities. Because the United States
government is not obligated by law to provide support to an instrumentality
that it sponsors, a fund will invest in obligations issued by such an
instrumentality only if SSB Citi determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for
investment by the fund.
Bank Obligations (All funds). Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to be
insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state
banking authorities, but are members of the Federal Reserve System only if
they elect to join. Most state banks are insured by the FDIC (although such
insurance may not be of material benefit to a fund, depending upon the
principal amount of certificates of deposit ("CDs") of each held by the
fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of Federal and state laws and
regulations, domestic branches of domestic banks are, among other things,
generally required to maintain specified levels of reserves, and are
subject to other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of U.S. banks, such as CDs and time
deposits ("TDs"), may be general obligations of the parent bank in addition
to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Obligations of foreign branches of
U.S. banks and foreign banks are subject to different risks than are those
of U.S. banks or U.S. branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on
the obligations, foreign exchange controls and foreign withholding and
other taxes on interest income. Foreign branches of U.S. banks are not
necessarily subject to the same or similar regulatory requirements that
apply to U.S. banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial recordkeeping
requirements. In addition, less information may be publicly available about
a foreign branch of a U.S. bank than about a U.S. bank. CDs issued by
wholly owned Canadian subsidiaries of U.S. banks are guaranteed as to
repayment of principal and interest, but not as to sovereign risk, by the
U.S. parent bank.
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by Federal and state regulation as well
as governmental action in the country in which the foreign bank has its
head office. A U.S. branch of a foreign bank with assets in excess of $1
billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if
the branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (a) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) maintain assets within
the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through all of its
agencies or branches within the state. The deposits of State Branches may
not necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a U.S. branch of a foreign bank than
about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, SSB Citi will
carefully evaluate such investments on a case-by-case basis.
The Exchange Reserve Fund may purchase a CD issued by a bank, savings and
loan association or other banking institution with less than $1 billion in
assets (a "Small Issuer CD") so long as the issuer is a member of the FDIC
or Office of Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF"), and so long as the principal amount of the Small
Issuer CD is fully insured and is no more than $100,000. The Exchange
Reserve Fund will at any one time hold only one Small Issuer CD from any
one issuer. Savings and loan associations whose CDs may be purchased by the
funds are members of the Federal Home Loan Bank and are insured by the
SAIF. As a result, such savings and loan associations are subject to
regulation and examination.
Corporate Debt Securities (Balanced, Convertible, Diversified Strategic
Income, High Income and Total Return Bond Funds). Corporate debt
securities include corporate bonds, debentures, notes and other similar
debt securities issued by companies.
Ratings as Investment Criteria (All funds). In general, the ratings of
NRSROs represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and
subjective, and are not absolute standards of quality and do not evaluate
the market value risk of the securities. These ratings will be used by the
funds as initial criteria for the selection of portfolio securities, but
the funds also will rely upon the independent advice of SSB Citi and/or sub-
investment advisers to evaluate potential investments. Among the factors
that will be considered are the long-term ability of the issuer to pay
principal and interest, and general economic trends. The Appendix to this
statement of additional information contains further information concerning
the rating categories of NRSROs and their significance.
Subsequent to its purchase by a fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for
purchase by the fund. In addition, it is possible that an NRSRO might not
change its rating of a particular issue to reflect subsequent events. None
of these events will require sale of such securities by a fund, but SSB Citi
and/or a fund's sub-investment adviser will consider such events in its
determination of whether the fund should continue to hold the securities.
In addition, to the extent that the ratings change as a result of changes
in such organizations or their rating systems, or due to a corporate
reorganization, a fund will attempt to use comparable ratings as standards
for its investments in accordance with its investment objective and
policies.
When-Issued Securities and Delayed-Delivery Transactions (Balanced,
Diversified Strategic Income, High Income, Total Return Bond and Municipal
High Income). In order to secure yields or prices deemed advantageous at
the time, the funds may purchase or sell securities on a when-issued or
delayed-delivery basis. A fund will enter into a when-issued transaction
for the purpose of acquiring portfolio securities and not for the purpose
of leverage.] In such transactions delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery is made
by the fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased
or sold on a when-issued or delayed-delivery basis, the yields obtained on
those securities may be higher or lower than the yields available in the
market on the dates when the investments are actually delivered to the
buyers. Each fund will establish a segregated account consisting of cash
and liquid securitieshaving a value equal to or greater than the fund's
purchase commitments, provided such securities have been determined by
SSB Citi to be liquid and unencumbered and are marked to market daily pursuant
to guidelines established by the trustees. Placing securities rather than
cash in the segregated account may have a leveraging effect on the fund's
net assets.
U.S. government securities and Municipal Securities (as defined below) are
normally subject to changes in value based upon changes, real or
anticipated, in the level of interest rates and, although to a lesser
extent in the case of U.S. government securities, the public's perception
of the creditworthiness of the issuers. In general, U.S. government
securities and Municipal Securities tend to appreciate when interest rates
decline and depreciate when interest rates rise. Purchasing these
securities on a when-issued or delayed-delivery basis, therefore, can
involve the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. Similarly, the sale of U.S. government securities for delayed
delivery can involve the risk that the prices available in the market when
the delivery is made may actually be higher than those obtained in the
transaction itself.
In the case of the purchase of securities on a when-issued or delayed-
delivery basis by a fund, the fund will meet its obligations on the
settlement date from then-available cash flow, the sale of securities held
in the segregated account, the sale of other securities or, although it
would not normally expect to do so, from the sale of the securities
purchased on a when-issued or delayed-delivery basis (which may have a
value greater or less than the fund's payment obligations).
Zero Coupon Bonds (Balanced, Diversified Strategic Income, High Income,
Municipal High Income and Total Return Bond Funds). A zero coupon bond
pays no interest in cash to its holder during its life, although interest
is accrued during that period. Its value to an investor consists of the
difference between its face value at the time of maturity and the price
for which it was acquired, which is generally an amount significantly less
than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be
subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities which make
periodic distributions of interest. On the other hand, because there are
no periodic interest payments to be reinvested prior to maturity, zero
coupon securities eliminate reinvestment risk and lock in a rate of return
to maturity. Diversified Strategic and High Income Funds also may invest
in payment-in-kind bonds, which, like zero coupon bonds, make no cash
payment until maturity.
Mortgage-Related Securities (Balanced, Diversified Strategic Income,
Exchange Reserve and Total Return Bond Funds). Mortgage-related securities
provide a monthly payment consisting of interest and principal payments.
Additional payments may be made out of unscheduled repayments of principal
resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on mortgage-related securities may tend to
increase due to refinancing of mortgages as interest rates decline.
Mortgage pools created by private organizations generally offer a higher
rate of interest than government and government-related pools because no
direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these
pools, however, may be supported by various forms of private insurance or
guarantees, including individual loan, title, pool and hazard insurance.
There can be no assurance that the private insurers can meet their
obligations under the policies. Prompt payment of principal and interest
on GNMA mortgage pass-through certificates is backed by the full faith and
credit of the United States. FNMA guaranteed mortgage pass-through
certificates and FHLMC participation certificates are solely the
obligations of those entities but are supported by the discretionary
authority of the United States government to purchase the agencies'
obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through
certificates that are structured to direct payments on underlying
collateral to different series or classes of the obligations.
To the extent that a fund purchases mortgage-related securities at a
premium, mortgage foreclosures and prepayments of principal by mortgagors
(which may be made at any time without penalty) may result in some loss of
the fund's principal investment to the extent of the premium paid. A
fund's yield may be affected by reinvestment of prepayments at higher or
lower rates than the original investment. In addition, like other debt
securities, the values of mortgage-related securities, including
government and government-related mortgage pools, generally will fluctuate
in response to market interest rates.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by unscheduled payments
on the underlying mortgages. Factors affecting mortgage prepayments include
the level of interest rates, general economic and social conditions, the
location of the mortgaged property and age of the mortgage. Because
prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. Common practice
is to assume that prepayments will result in an average life ranging from 2
to 10 years for pools of fixed-rate 30-year mortgages. Pools of mortgages
with other maturities or different characteristics will have varying
average life assumptions.
Mortgage-related securities may be classified as private, governmental or
government-related, depending on the issuer or guarantor. Private mortgage-
related securities represent pass-through pools consisting principally of
conventional residential mortgage loans created by non-governmental
issuers, such as commercial banks, savings and loan associations and
private mortgage insurance companies. Governmental mortgage-related
securities are backed by the full faith and credit of the United States.
GNMA, the principal guarantor of such securities, is a wholly owned United
States government corporation within the Department of Housing and Urban
Development. Government-related mortgage-related securities are not backed
by the full faith and credit of the United States government. Issuers of
such securities include FNMA and FHLMC. FNMA is a government-sponsored
corporation owned entirely by private stockholders, which is subject to
general regulation by the Secretary of Housing and Urban Development. Pass-
through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA. FHLMC is a corporate instrumentality of the
United States, the stock of which is owned by the Federal Home Loan Banks.
Participation certificates representing interests in mortgages from FHLMC's
national portfolio are guaranteed as to the timely payment of interest and
ultimate collection of principal by FHLMC.
Private, U.S. governmental or government-related entities create mortgage
loan pools offering pass-through investments in addition to those described
above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or
interest payments may vary or whose terms to maturity may be shorter than
previously customary. As new types of mortgage-related securities are
developed and offered to investors, Diversified Strategic Income Fund,
consistent with its investment objective and policies, will consider making
investments in such new types of securities.
Forward Roll Transactions (Balanced, Diversified Strategic Income Fund and
Total Return Bond Funds). In order to enhance current income, these funds
may enter into forward roll transactions with respect to mortgage-related
securities issued by Government National Mortgage Association ("GNMA"),
FNMA and Federal Home Loan Mortgage Corporation ("FHLMC"). In a forward
roll transaction, a fund sells a mortgage security to a financial
institution, such as a bank or broker-dealer and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories than
those sold. During the period between the sale and repurchase, the fund
will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, particularly repurchase agreements, and the income from these
investments, together with any additional fee income received on the sale
will generate income for the fund exceeding the yield on the securities
sold. Forward roll transactions involve the risk that the market value of
the securities sold by the fund may decline below the repurchase price of
those securities. At the time a fund enters into forward roll
transactions, it will place in a segregated account with the fund's
custodian cash, U.S. government securities, equity securities or debt
securities of any grade having a value equal to or greater than the fund's
purchase commitments, provided such securities have been determined by
SSB Citi to be liquid and unencumbered and are marked to market daily pursuant
to guidelines established by the trustees. The fund will subsequently
monitor the account to insure that such equivalent value is maintained.
Asset-Backed Securities (Balanced, Exchange Reserve, Diversified Strategic
Income Fund and Total Return Bond Funds). An asset-backed security
represents an interest in a pool of assets such as receivables from credit
card loans, automobile loans and other trade receivables. Changes in the
market's perception of the asset backing the security, the
creditworthiness of the servicing agent for the loan pool, the originator
of the loans, or the financial institution providing any credit
enhancement will all affect the value of an asset-backed security, as will
the exhaustion of any credit enhancement. The risks of investing in
asset-backed securities ultimately depend upon the payment of the consumer
loans by the individual borrowers. In its capacity as purchaser of an
asset-backed security, a fund would generally have no recourse to the
entity that originated the loans in the event of default by the borrower.
Additionally, in the same manner as described above under "Mortgage-
Related Securities" with respect to prepayment of a pool of mortgage loans
underlying mortgage-related securities, the loans underlying asset-backed
securities are subject to prepayments, which may shorten the weighted
average life of such securities and may lower their return.
Non-Taxable Municipal Securities (Municipal High Income Fund). Non-taxable
Municipal securities include debt obligations issued to fund various public
purposes, such as constructing public facilities, refunding outstanding
obligations, paying general operating expenses and extending loans to
public institutions and facilities. Private activity bonds that are issued
by or on behalf of public authorities to finance privately operated
facilities are considered to be Municipal Securities if the interest paid
thereon may be excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes in the
opinion of bond counsel to the issuer.
Municipal bonds may be issued to finance life care facilities. Life care
facilities are an alternative form of long-term housing for the elderly
which offer residents the independence of condominium life style and, if
needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state industrial development
authorities. Because the bonds are secured only by the revenues of each
facility and not by state or local government tax payments, they are
subject to a wide variety of risks, including a drop in occupancy levels,
the difficulty of maintaining adequate financial reserves to secure
estimated actuarial liabilities, the possibility of regulatory cost
restrictions applied to health care delivery and competition from
alternative health care or conventional housing facilities.
Municipal leases are Municipal Securities that may take the form of a lease
or an installment purchase contract issued by state and local governmental
authorities to obtain funds to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations make it possible for state and
local government authorities to acquire property and equipment without
meeting constitutional and statutory requirements for the issuance of debt.
Thus, municipal leases have special risks not normally associated with
municipal bonds. These obligations frequently contain "non-appropriation"
clauses providing that the governmental issuer of the obligation has no
obligation to make future payments under the lease or contract unless money
is appropriated for such purposes by the legislative body on a yearly or
other periodic basis. In addition to the "non-appropriation" risk,
municipal leases represent a type of financing that has not yet developed
the depth of marketability associated with municipal bonds; moreover,
although the obligations will be secured by the leased equipment, the
disposition of the equipment in the event of foreclosure might prove to be
difficult. In order to limit such risks, Municipal High Income Fund
proposes to purchase either (a) municipal leases rated in the four highest
categories by Moody's or S&P or (b) unrated municipal leases purchased
principally from domestic banks or other responsible third parties which
enter into an agreement with the fund, which provides that the seller will
either remarket or repurchase the municipal lease within a short period
after demand by the fund.
Taxable Municipal Securities (Total Return Bond Fund). The Total Return
Bond Fund will invest in a diversified portfolio of taxable long-term
investment-grade securities issued by or on behalf of states and municipal
governments, U.S. territories and possessions of the United States and
their authorities, agencies, instrumentalities and political subdivisions
("Taxable Municipal Obligations"). The Taxable Municipal Obligations in
which the fund may invest are within the four highest ratings of Moody's
(Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB). Although securities rated in
these categories are commonly referred to as investment grade, they may
have speculative characteristics. In addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities. Furthermore, the market for Taxable Municipal
Obligations is relatively small, which may result in a lack of liquidity
and in price volatility of those securities. Interest on Taxable
Municipal Obligations is includable in gross income for Federal income tax
purposes and may be subject to personal income taxes imposed by any state
of the United States or any political subdivision thereof, or by the
District of Columbia.
Variable-Rate Demand Notes (Municipal High Income Fund). Municipal
Securities purchased by Municipal High Income Fund may include
variable-rate demand notes issued by industrial development authorities
and other governmental entities. Although variable-rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by
the fund will be determined by SSB Citi to be of comparable quality at the
time of purchase to instruments rated "'high quality" (that is, within the
two highest ratings) by any NRSRO. In addition, while no active secondary
market may exist with respect to a particular variable-rate demand note
purchased by the fund, the fund may, upon the notice specified in the
note, demand payment of the principal of and accrued interest on the note
at any time and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it
difficult for the fund to dispose of the variable-rate demand note
involved in the event that the issuer of the note defaulted on its payment
obligations, and the fund could, for this or other reasons, suffer a loss
to the extent of the default.
Stand-by Commitments (Municipal High Income Fund). Municipal High Income
Fund may acquire "stand-by commitments" with respect to Municipal
Securities held in its portfolio. Under a stand-by commitment, a dealer
agrees to purchase, at the fund's option, specified Municipal Securities
at a specified price. The fund may pay for stand-by commitments either
separately in cash or by paying a higher price for the securities acquired
with the commitment, thus increasing the cost of the securities and
reducing the yield otherwise available for them. The fund intends to
enter into stand-by commitments only with brokers, dealers and banks that,
in the view of SSB Citi, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, SSB Citi will
periodically review relevant financial information concerning the issuer's
assets, liabilities and contingent claims. The fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend
to exercise its rights thereunder for trading purposes.
Repurchase Agreements (All funds). The funds may engage in repurchase
agreements with certain member banks of the Federal Reserve System and
with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, the
fund would acquire an underlying debt obligation for a relatively short
period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the
fund's holding period. This arrangement results in a fixed rate of return
that is not subject to market fluctuations during the fund's holding
period. The value of the underlying securities will be at least equal at
all times to the total amount of the repurchase obligation, including
interest. Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party, including possible delays or
restrictions upon the fund's ability to dispose of the underlying
securities, the risk of a possible decline in the value of the underlying
securities during the period in which the fund seeks to assert its right
to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the
agreement. SSB Citi, acting under the supervision of the trust's board of
trustees, reviews on an ongoing basis the value of the collateral and
creditworthiness of those banks and dealers with which the fund enters
into repurchase agreements to evaluate potential risks.
Reverse Repurchase Agreements (Balanced, Diversified Strategic Income Fund
and Total return Bond Funds). These funds may enter into reverse
repurchase agreement transactions with member banks of the Federal Reserve
Bank of New York's list of reporting dealers. A reverse repurchase
agreement, which is considered a borrowing by the fund, involves a sale by
the fund of securities that it holds concurrently with an agreement by the
fund to repurchase the same securities at an agreed-upon price and date.
The fund typically will invest the proceeds of a reverse repurchase
agreement in money market instruments or repurchase agreements maturing
not later than the expiration of the reverse repurchase agreement. This
use of the proceeds is known as leverage. The fund will enter into a
reverse repurchase agreement for leverage purposes only when the interest
income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. The fund also may use the
proceeds of reverse repurchase agreements to provide liquidity to meet
redemption requests when the sale of the fund's securities is considered
to be disadvantageous.
Lending of Portfolio Securities (Convertible, Diversified Strategic Income,
High Income, Total Return Bond and Balanced Funds). These funds have the
ability to lend portfolio securities to brokers, dealers and other
financial organizations. Such loans, if and when made, may not exceed 20%
of a fund's total assets taken at value, except Total Return Bond Fund,
which may lend its portfolio securities to the fullest extent allowed under
the 1940 Act. A fund will not lend portfolio securities to Salomon Smith
Barney unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. government securities which are maintained at all
times in an amount at least equal to the current market value of the loaned
securities. From time to time, a fund may pay a part of the interest earned
from the investment of collateral received for securities loaned to the
borrower and/or a third party which is unaffiliated with the fund and is
acting as a "finder."
By lending its securities, a fund can increase its income by continuing to
receive interest on the loaned securities as well as by either investing
the cash collateral in short-term instruments or obtaining yield in the
form of interest paid by the borrower when U.S. government securities are
used as collateral. A fund will comply with the following conditions
whenever its portfolio securities are loaned: (a) the fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of the
securities loaned rises above the level of such collateral; (c) the fund
must be able to terminate the loan at any time; (d) the fund must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (e) the fund may pay only reasonable custodian fees in connection
with the loan; and (f) voting rights on the loaned securities may pass to
the borrower; provided, however, that if a material event adversely
affecting the investment in the loaned securities occurs, the trust's board
of trustees must terminate the loan and regain the right to vote the
securities. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of a possible delay in receiving
additional collateral or in the recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Loans
will be made to firms deemed by SSB Citi to be of good standing and will not be
made unless, in the judgment SSB Citi, the consideration to be earned from such
loans would justify the risk.
Medium-, Low- and Unrated Securities (Convertible, Diversified Strategic
Income, High Income, Total Return Bond and Municipal High Income Funds).
These funds may invest in medium- or low- rated securities and unrated
securities of comparable quality. Generally, these securities offer a
higher current yield than the yield offered by higher-rated securities,
but involve greater volatility of price and risk of loss of income and
principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated
securities: (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are
outweighed by large uncertainties or major risk exposures to adverse
conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation. Thus, it is possible that these types of
factors could, in certain instances, reduce the value of securities held
by a fund with a commensurate effect on the value of the fund's shares.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than
do those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated
securities. In addition, medium- and low-rated and comparable unrated
securities generally present a higher degree of credit risk. Issuers of
medium- and low-rated and comparable unrated securities are often highly
leveraged and may not have more traditional methods of financing available
to them so that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest rates may
be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. The fund may incur additional
expenses to the extent that it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. In
addition, the markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher- rated securities are traded. The existence of limited markets for
these securities may restrict the availability of securities for the fund
to purchase and also may have the effect of limiting the ability of the
fund to: (a) obtain accurate market quotations for purposes of valuing
securities and calculating net asset value and (b) sell securities at
their fair value either to meet redemption requests or to respond to
changes in the economy or the financial markets. The market for medium-
and low-rated and comparable unrated securities is relatively new and has
not fully weathered a major economic recession. Any such recession,
however, could likely disrupt severely the market for such securities and
adversely affect the value of such securities. Any such economic downturn
also could adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders,
such as the applicable fund. If an issuer exercises these rights during
periods of declining interest rates, the fund may have to replace the
security with a lower yielding security, resulting in a decreased return
to the fund.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay
principal. Securities that are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over
any long period of time may be small. Securities that are rated Caa or CCC
are of poor standing. These issues may be in default or present elements
of danger may exist with respect to principal or interest.
In light of the risks described above, SSB Citi, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility
financed by the issue, the ability of the issuer's management and
regulatory matters.
Options on Securities (Convertible, Diversified Strategic Income, High
Income, and Balanced Funds). High Income Fund may write (sell) covered
call options. Balanced Fund may write covered call options and may
purchase and write secured put options. Convertible Fund and Diversified
Strategic Income Fund may purchase and write covered call and secured put
options. Each of these funds may enter into closing transactions with
respect to the options transactions in which it may engage. Balanced Fund
also may write "straddles," which are combinations of secured puts and
covered calls on the same underlying security.
The aggregate value of the obligations underlying calls on securities
which are written by Balanced Fund and covered with cash or other eligible
segregated assets, together with the aggregate value of the obligations
underlying put options written by the fund, will not exceed 50% of the
fund's net assets. Balanced Fund will not purchase puts or calls on
securities if more than 5% of its assets would be invested in premiums on
puts and calls, not including that portion of the premium which reflects
the value of the securities owned by the fund and underlying a put at the
time of purchase. Convertible 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 that it purchases the underlying security or at a later time.
Diversified Strategic Income Fund may utilize up to 15% of its assets to
purchase options and may do so at or about the same time that it purchases
the underlying security or at a later time.
The Diversified Strategic Income Fund may purchase and sell put, call and
other types of option securities that are traded on domestic or foreign
exchanges or the over-the-counter market including, but not limited to,
"spread" options, "knock-out" options, "knock-in" options and "average
rate" or "look-back" options. "Spread" options are dependent upon the
difference between the price of two securities or futures contracts.
"Knock-out" options are canceled if the price of the underlying asset
reaches a trigger level prior to expiration. "Knock-in" options only have
value if the price of the underlying asset reaches a trigger level.
"Average rate" or "Look-back" options are options where the option's strike
price at expiration is set based on either the average, maximum or minimum
price of the asset over the period of the option.
A call is covered if the fund (a) owns the optioned securities, (b)
maintains in a segregated account cash or liquid securities having a value
equal to or greater than the fund's obligations under the call, provided
such securities have been determined by SSB Citi to be liquid and unencumbered
pursuant to guidelines established by the trustees ("eligible segregated
assets") or (c) owns an offsetting call option.
Writing call and put options. When a fund writes a call, it receives a
premium and gives the purchaser the right to buy the underlying security
at any time during the call period (usually not more than nine months in
the case of common stock or fifteen months in the case of U.S. government
securities) at a fixed exercise price regardless of market price changes
during the call period. If the call is exercised, the fund forgoes any
gain from an increase in the market price of the underlying security over
the exercise price. When a fund writes a put, it receives a premium and
gives the purchaser of the put the right to sell the underlying security
to the fund at the exercise price at any time during the option period.
When a fund purchases a put, it pays a premium in return for the right to
sell the underlying security at the exercise price at any time during the
option period. For the purchase of a put to be profitable, the market
price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put
is sold in a closing sale transaction; otherwise, the purchase of the put
effectively increases the cost of the security and thus reduces its yield.
A fund may write puts on securities only if they are "secured." A put is
"secured" if the fund maintains cash or other eligible segregated assets
with a value equal to the exercise price in a segregated account or holds
a put on the same underlying security at an equal or greater exercise
price.
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. Diversified Strategic Income
Fund, however, may engage in option transactions only to hedge against
adverse price movements in the securities that it holds or may wish to
purchase and the currencies in which certain portfolio securities may be
denominated. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying
security above the strike price for the life of the option (or until a
closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options
is to realize income in the form of premiums. The writer of a covered put
option accepts the risk of a decline in the price of the underlying
security. The size of the premiums that a fund may receive may be adversely
affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by a fund normally will have expiration dates between one
and nine months from the date written. The exercise price of the options
may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call
options, these exercise prices are referred to as "in-the-money," "at-the-
money" and "out-of-the-money," respectively. A fund with option-writing
authority may write (a) in-the-money call options when SSB Citi or its sub-
investment adviser expects that the price of the underlying security will
remain flat or decline moderately during the option period, (b) at-the-
money call options when SSB Citi expects that the price of the underlying
security will remain flat or advance moderately during the option period
and (c) out-of-the-money call options when SSB Citi expects that the price of
the underlying security may increase but not above a price equal to the sum
of the exercise price plus the premiums received from writing the call
option. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price,
the amount of any realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and in-the-money put
options (the reverse of call options as to the relation of exercise price
to market price) may be utilized in the same market environments that such
call options are used in equivalent transactions.
So long as the obligation of a fund as the writer of an option continues,
the fund may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring the fund to deliver (in the case of a
call) or take delivery of (in the case of a put) the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the fund effects a closing purchase transaction. A fund
can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it writes a call option,
or to pay for the underlying security when it writes a put option, a fund
will be required to deposit in escrow the underlying security or other
assets in accordance with the rules of the Options Clearing Corporation
(the "Clearing Corporation") or similar foreign clearing corporation and of
the securities exchange on which the option is written.
Purchasing call and Put Options. A fund may purchase put and call options
that are traded on a domestic securities exchange. By buying a put, the
fund limits the risk of loss from a decline in the market value of the
security until the put expires. Any appreciation in the value of the
yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and
any related transaction costs. call option 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.
Closing Transactions. A fund may engage in a closing purchase transaction
to realize a profit, to prevent an underlying security from being called
or put or to unfreeze an underlying security (thereby permitting its sale
or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the fund
would purchase, prior to the holder's exercise of an option that the fund
has written, an option of the same series as that on which the fund
desires to terminate its obligation. The obligation of the fund under an
option that it has written would be terminated by a closing purchase
transaction, but the fund would not be deemed to own an option as the
result of the transaction. There can be no assurance that the fund will
be able to effect closing purchase transactions at a time when it wishes
to do so. [To facilitate closing purchase transactions, however, a fund
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.] Balanced
Fund will purchase and sell only options which are listed on a national
securities exchange and will write options only through a national options
clearing organization.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options
on U.S. government securities is relatively new, so that it is impossible
to predict to what extent liquid markets will develop or continue.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange
or in the over-the-counter market. In light of this fact and current
trading conditions, the fund expects to purchase only call or put options
issued by the Clearing Corporation. The funds with option-writing authority
expect to write options only on U.S. securities exchanges, except that the
Diversified Strategic Income Fund also may write options on foreign
exchanges and in the over-the-counter market.
A fund may realize a profit or loss upon entering into a closing
transaction. In cases in which a fund has written an option, it will
realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a
loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when a fund has
purchased an option and engages in a closing sale transaction, whether the
fund realizes a profit or loss will depend upon whether the amount received
in the closing sale transaction is more or less than the premium that the
fund initially paid for the original option plus the related transaction
costs.
Although a fund generally will purchase or write only those options for
which SSB Citi or its 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 Clearing
Corporation as well U.S. and foreign securities exchanges and resulted in
the institution of special procedures such as trading rotations,
restrictions on certain types of orders or trading halts or suspensions in
one or more options. There can be no assurance that similar events, or
events that may otherwise interfere with the timely execution of customers'
orders, will not recur. In such event, it might not be possible to effect
closing transactions in particular options. If a fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class that may be held, written or
exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are written on the
same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that
the funds with authority to engage in options transactions, and other
clients of SSB Citi and certain of its affiliates, may be considered to be such
a group. A securities exchange may order the liquidation of positions found
to be in violation of these limits and it may impose certain other
sanctions.
In the case of options that are deemed covered by virtue of the fund's
holding convertible or exchangeable preferred stock or debt securities, the
time required to convert or exchange and obtain physical delivery of the
underlying common stocks with respect to which the fund has written options
may exceed the time within which the fund must make delivery in accordance
with an exercise notice. In these instances, a fund may purchase or borrow
temporarily the underlying securities for purposes of physical delivery. By
so doing, the fund will not bear any market risk because the fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed stock, but the fund may
incur additional transaction costs or interest expenses in connection with
any such purchase or borrowing.
Additional risks exist with respect to certain of U.S. government
securities for which a fund may write covered call options. If a fund
writes covered call options on mortgage-backed securities, the securities
that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. The fund will
compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of those securities.
Stock Index Options (Balanced Fund). Balanced Fund may purchase and write
put and call options on U.S. stock indexes listed on U.S. exchanges for the
purpose of hedging its portfolio. A stock index fluctuates with changes in
the market values of the stocks included in the index. Some stock index
options are based on a broad market index such as the New York Stock
Exchange Composite Index or a narrower market index such as the Standard &
Poor's 100. Indexes also are based on an industry or market segment such as
the AMEX Oil and Gas Index or the Computer and Business Equipment Index.
In writing a call on a stock index, the fund receives a premium and agrees
that during the call period purchasers of a call, upon exercise of the
call, will receive an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of
the call. When the fund buys a call on a stock index, it pays a premium
and during the call period the fund, upon exercise of the call, receives
an amount of cash if the closing level of the stock index upon which the
call is based is greater than the exercise price of the call. The fund
also may purchase and sell stock index puts, which differ from puts on
individual securities in that they are settled in cash based on the values
of the securities in the underlying index, rather than by delivery of the
underlying securities. Purchase of a stock index put is designed to
protect against a decline in the value of the fund's portfolio generally,
rather than an individual security in the portfolio. Stock index puts are
sold primarily to realize income from the premiums received on the sale of
such options. If any put is not exercised or sold, it will become
worthless on its expiration date.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level
of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price
of the option. The amount of cash received will be equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may
let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether Balanced Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in
the level of stock prices in the stock market generally or, in the case of
certain indexes, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by a fund of
options on stock indexes will be subject to SSB Citi's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the prices of individual stocks.
The Balanced Fund will engage in stock index options transactions only when
determined by SSB Citi to be consistent with the funds' efforts to control
risk. There can be no assurance that such judgment will be accurate or that
the use of these portfolio strategies will be successful. When 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.
Currency Transactions (Diversified Strategic Income, Balanced and High
Income Funds). The funds' dealings in forward currency exchange
transactions will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward currency contracts with respect to specific receivables or
payables of the fund generally arising in connection with the purchase or
sale of its securities. Position hedging, generally, is the sale of forward
currency contracts with respect to portfolio security positions denominated
or quoted in the currency. A fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value of
the security at any time, or securities held in its portfolio denominated
or quoted in, or currently convertible into (such as through exercise of an
option or consummation of a forward currency contract) that particular
currency. If a fund enters into a transaction hedging or position hedging
transaction, it will cover the transaction through one or more of the
following methods: (a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter into an
offsetting forward currency contract; (c) entering into a forward contract
to purchase currency being sold, or to sell currency being purchased,
provided that such covering contract is itself covered by any one of these
methods unless the covering contract closes out the first contract; or (d)
depositing into a segregated account with the custodian or a sub-custodian
of the fund cash or readily marketable securities in an amount equal to the
value of the fund's total assets committed to the consummation of the
forward currency contract and not otherwise covered. In the case of
transaction hedging, any securities placed in the account must be liquid
debt securities. In any case, if the value of the securities placed in the
segregated account declines, additional cash or securities will be placed
in the account so that the value of the account will equal the above
amount. Hedging transactions may be made from any foreign currency into
dollars or into other appropriate currencies.
At or before the maturity of a forward contract, a fund may either sell a
portfolio security and make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing
a second contract pursuant to which the relevant fund will obtain, on the
same maturity date, the same amount of the currency which it is obligated
to deliver. If a fund retains the portfolio security and engages in an
offsetting transaction, the fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement
has occurred in forward contract prices. Should forward prices decline
during the period between a fund's entering into a forward contract for the
sale of a currency and the date that it enters into an offsetting contract
for the purchase of the currency, the fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In
addition, although forward currency contracts limit the risk of loss due to
a decline in the value of the hedged currency, at the same time they limit
any potential gain that might result should the value of the currency
increase.
If a devaluation is generally anticipated, the Diversified Strategic Income
and High Income Funds may not be able to contract to sell the currency at a
price above the devaluation level they anticipate.
Foreign Currency Options (Diversified Strategic Income and High Income
Funds). The High Income Fund may only purchase put and call options on
foreign currencies, whereas the Diversified Strategic Income Fund may
purchase or write put and call options on foreign currencies for the
purpose of hedging against changes in future currency exchange rates.
Foreign currency options generally have three, six and nine month
expiration cycles. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the spot price
of the currency at the time the option expires. Call options convey the
right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time that the option
expires.
The fund may use foreign currency options under the same circumstances that
it could use forward currency exchange transactions. A decline in the
dollar value of a foreign currency in which a fund's securities are
denominated, for example, will reduce the dollar value of the securities
even if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of securities that it holds,
the fund may purchase put options on the foreign currency. If the value of
the currency declines, the fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part,
the adverse effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby potentially increasing
the cost of the securities, the fund may purchase call options on the
particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. The
benefit to the fund derived from purchases of foreign currency options,
like the benefit derived from other types of options, will be reduced by
the amount of the premium and related transaction costs. In addition, if
currency exchange rates do not move in the direction or to the extent
anticipated, the fund could sustain losses on transactions in foreign
currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
Futures Activities (Convertible, Diversified Strategic Income, High Income,
Municipal High Income, Total Return Bond and Balanced Funds). These funds
may enter into futures contracts and/or options on futures contracts that
are traded on a U.S. exchange or board of trade. These investments may be
made by a fund for the purpose of hedging against the effects of changes in
the value of its portfolio securities due to anticipated changes in
interest rates, currency values and/or market conditions but not for
purposes of speculation. In the case of Municipal High Income Fund,
investments in futures contracts will be made only in unusual
circumstances, such as when SSB Citi anticipates an extreme change in interest
rates or market conditions. See "Taxes" below.
Futures Contracts (Convertible, Diversified Strategic Income, Municipal
High Income, Total Return Bond and Balanced Funds). The funds may acquire
or sell a futures contract to mitigate the effect of fluctuations in
interest rates, currency values or market conditions (depending on the type
of contract) on portfolio securities without actually buying or selling the
securities. For example, if Municipal High Income Fund owns long-term bonds
and tax-exempt rates are expected to increase, the fund might enter into a
short position in municipal bond index futures contracts. Such a sale would
have much the same effect as the fund's selling some of the long-term bonds
in its portfolio. If tax-exempt rates increase as anticipated, the value of
certain long-term Municipal Securities in the fund would decline, but the
value of the fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the fund from declining
as much as it otherwise would have. Of course, because the value of
portfolio securities will far exceed the value of the futures contracts
sold by a fund, an increase in the value of the futures contracts could
only mitigate, not totally offset, the decline in the value of the fund.
In purchasing and selling futures contracts and related options, a fund
will comply with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC"), under which the fund is excluded from
regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona fide
hedging purposes (or that the underlying commodity value of a fund's long
positions not exceed the sum of certain identified liquid investments) and
(b) a fund not enter into futures and related options for which the
aggregate initial margin and premiums exceed 5% of the fair market value
of the fund's assets. In order to prevent leverage in connection with the
purchase of futures contracts by a fund, an amount of cash or other
eligible segregated assets equal to the market value of futures contracts
purchased will be maintained in a segregated account on the books of the
fund or with PNC Bank. A fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. A fund may purchase and sell interest
rate futures contracts as a hedge against changes in interest rates. An
interest rate futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. Interest rate
futures contracts are traded on designated "contracts markets" which,
through their clearing corporations, guarantee performance of the
contracts. Currently, there are interest rate futures contracts based on
securities such as long-term Treasury bonds, Treasury notes, GNMA
certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into an interest rate
futures contract for the sale of securities has an effect similar to the
actual sale of securities, although sale of the interest rate futures
contract might be accomplished more easily and quickly. For example, if a
fund holds long-term U.S. government securities and SSB Citi anticipates a
rise in long-term interest rates, the fund could, in lieu of disposing of
its portfolio securities, enter into interest rate futures contracts for
the sale of similar long-term securities. If interest rates increased and
the value of the fund's securities declined, the value of the fund's
interest rate futures contracts would increase, thereby protecting the
fund by preventing the net asset value from declining as much as it
otherwise would have declined. Similarly, entering into interest rate
futures contracts for the purchase of securities has an effect similar to
the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For
example, if SSB Citi expects long-term interest rates to decline, the fund
might enter into interest rate futures contracts for the purchase of
long-term securities, so that it could gain rapid market exposure that may
offset anticipated increases in the cost of securities that it intends to
purchase, while continuing to hold higher-yielding short-term securities
or waiting for the long-term market to stabilize.
Stock Index Futures Contracts. A fund may purchase and sell stock index
futures contracts. These transactions, if any, by the fund will be made
solely for the purpose of hedging against the effects of changes in the
value of its portfolio securities due to anticipated changes in market
conditions and will be made when the transactions are economically
appropriate to the reduction of risks inherent in the management of the
fund. A stock index futures contract is an agreement under which two
parties agree to take or make delivery of the amount of cash based on the
difference between the value of a stock index at the beginning and at the
end of the contract period. When the fund enters into a stock index
futures contract, it must make an initial deposit, known as "initial
margin," as a partial guarantee of its performance under the contract. As
the value of the stock index fluctuates, either party to the contract is
required to make additional margin deposits, known as "variation margin,"
to cover any additional obligation that it may have under the contract.
Successful use of stock index futures contracts by a fund is subject to
certain special risk considerations. A liquid stock index futures market
may not be available when the fund seeks to offset adverse market
movements. In addition, there may be an imperfect correlation between
movements in the securities included in the index and movements in the
securities in the fund. Successful use of stock index futures contracts
is further dependent on SSB Citi's ability to predict correctly movements in
the direction of the stock markets and no assurance can be given that its
judgment in this respect will be correct.
The Diversified Strategic Income Fund may enter into futures contracts or
related options on futures contracts that are traded on a domestic or
foreign exchange or in the over-the-counter market. These investments may
be made for the purpose of hedging against changes in the value of its
portfolio securities but not for purposes of speculation. The ability of
the fund to trade in futures contracts may be limited by the requirements
of the Internal Revenue Code of 1986 as amended (the "Code"), applicable to
a regulated investment company.
When deemed advisable by SSB Citi, Total Return Bond Fund may enter into
futures contracts or related options traded on a domestic exchange or
board of trade. Such investments, if any, by the fund will be made solely
for the purpose of hedging against the effects of changes in the value of
the fund's securities due to anticipated changes in interest rates and
market conditions, and when the transactions are economically appropriate
for the reduction of risks inherent in the management of the fund. Total
Return Bond Fund may hedge up to 50% of its assets using futures contracts
or related options transactions.
Balanced Fund may not purchase futures contracts or related options if,
immediately thereafter, more than 30% of the fund's total assets would be
so invested. In addition, Balanced Fund may not at any time commit more
than 5% of its total assets to initial margin deposits on futures
contracts.
No consideration is paid or received by a fund upon entering into a futures
contract. Initially, a fund will be required to deposit with its custodian
an amount of cash or cash equivalents equal to approximately 1% to 10% of
the contract amount (this amount is subject to change by the board of trade
on which the contract is traded and members of such board of trade may
charge a higher amount). This amount, known as initial margin, is in the
nature of a performance bond or good faith deposit on the contract and is
returned to a fund upon termination of the futures contract, assuming that
all contractual obligations have been satisfied. Subsequent payments to and
from the broker, known as variation margin, will be made daily as the price
of the securities, currency or index underlying the futures contract
fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time
prior to expiration of a futures contract, a fund may elect to close the
position by taking an opposite position, which will terminate the fund's
existing position in the contract.
Several risks are associated with the use of futures contracts as a hedging
device. Successful use of futures contracts by a fund is subject to the
ability of SSB Citi to predict correctly movements in interest rates, stock or
bond indices or foreign currency values. These predictions involve skills
and techniques that may be different from those involved in the management
of the portfolio being hedged. In addition, there can be no assurance that
there will be a correlation between movements in the price of the
underlying securities, currency or index and movements in the price of the
securities which are the subject of the hedge. A decision of whether, when
and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates or currency values.
Although the funds with authority to engage in futures activity intend to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses. In such event, and in the event
of adverse price movements, a fund would be required to make daily cash
payments of variation margin and an increase in the value of the portion of
the portfolio being hedged, if any, may partially or completely offset
losses on the futures contract. As described above, however, there is no
guarantee that the price of the securities being hedged will, in fact,
correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
If a fund has hedged against the possibility of a change in interest rates
or currency or market values adversely affecting the value of securities
held in its portfolio and rates or currency or market values move in a
direction opposite to that which the fund has anticipated, the fund will
lose part or all of the benefit of the increased value of securities which
it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the fund had insufficient
cash, it may have to sell securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. These sales
of securities may, but will not necessarily, be at increased prices which
reflect the change in interest rates or currency values, as the case may
be.
Options on Futures Contracts. An option on an interest rate futures
contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in the underlying interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. A
fund may purchase put options on interest rate futures contracts in lieu
of, and for the same purpose as, sale of a futures contract. It also may
purchase such put options in order to hedge a long position in the
underlying interest rate futures contract in the same manner as it may
purchase puts on securities provided they are similarly "secured." An
option on a foreign currency futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser the right, but
not the obligation, to assume a long or short position in the relevant
underlying future currency at a predetermined exercise price at a time in
the future. Upon exercise of an option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures
contract. The potential for loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point
of sale, there are no daily cash payments to reflect changes in the value
of the underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value of a fund
investing in the option. The purchase of call options on futures contracts
is intended to serve the same purpose as the actual purchase of the
futures contract, and the fund will set aside cash and liquid securities
sufficient to purchase the amount of portfolio securities represented by
the underlying futures contracts.
Several risks are associated with options on futures contracts. The ability
to establish and close out positions on such options will be subject to the
existence of a liquid market. In addition, the purchase of put or call
options on interest rate and foreign currency futures will be based upon
predictions by SSB Citi or a fund's sub-investment adviser as to anticipated
trends in interest rates and currency values, as the case may be, which
could prove to be incorrect. Even if the expectations of SSB Citi or a fund's
sub-investment adviser are correct, there may be an imperfect correlation
between the change in the value of the options and of the portfolio
securities or the currencies being hedged.
Foreign Investments (Convertible, Diversified Strategic Income, High Income
and Balanced Funds). Investors should recognize that investing in foreign
companies involves certain considerations which are not typically
associated with investing in U.S. issuers. Since these funds may be
investing in securities denominated in currencies other than the U.S.
dollar, and since these funds may temporarily hold funds in bank deposits
or other money-market investments denominated in foreign currencies, the
funds may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. A change in the value of a foreign currency relative to the U.S.
dollar will result in a corresponding change in the dollar value of the
fund's assets denominated in that foreign currency. Changes in foreign
currency exchange rates may also affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net
investment income and gain, if any, to be distributed to shareholders by
the fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange
markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic
conditions and political developments in other countries. Of particular
importance are rates of inflation, interest rate levels, the balance of
payments and the extent of government surpluses or deficits in the Unites
States and the particular foreign country. All these factors are in turn
sensitive to the monetary, fiscal and trade policies pursued by the
governments of the United States and other foreign countries important to
international trade and finance. Government intervention may also play a
significant role. National governments rarely voluntarily allow their
currencies to float freely in response to economic forces. Sovereign
governments use a variety of techniques, such as intervention by a
country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies.
Many of the securities held by the funds will not be registered with, nor
the issuers thereof be subject to reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign issuers
are generally not subject to uniform financial reporting standards,
practices and requirements comparable to those applicable to U.S. issuers.
In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the fund, political or social
instability, or domestic developments which could affect U.S. investments
in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payment positions. The funds may
invest in securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid, and their prices are
more volatile, than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold. Due to the increased
exposure of a fund to market and foreign exchange fluctuations brought
about by such delays, and to the corresponding negative impact on fund
liquidity, the fund will avoid investing in countries which are known to
experience settlement delays which may expose the fund to unreasonable risk
of loss.
The interest payable on a fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim some
credit or deductions for such taxes with respect to their allocated shares
of such foreign tax payments, the general effect of these taxes will be to
reduce the fund's income. Additionally, the operating expenses of the funds
can be expected to be higher than those of an investment company investing
exclusively in U.S. securities, since the expenses of the fund, such as
custodial costs, valuation costs and communication costs, as well as the
rate of the investment advisory fees, though similar to such expenses of
some other international funds, are higher than those costs incurred by
other investment companies.
The funds may also purchase American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or
other securities representing underlying shares of foreign companies. ADRs
are publicly traded on exchanges or over-the-counter in the United States
and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depository's transaction fees, whereas under an
unsponsored arrangement, the foreign issuer assumes no obligation and the
depository's transaction fees are paid by the ADR holders. In addition,
less information is available in the United States about an unsponsored ADR
than about a sponsored ADR, and the financial information about a company
may not be as reliable for an unsponsored ADR as it is for a sponsored ADR.
The fund may invest in ADRs through both sponsored and unsponsored
arrangements.
Eurodollar or Yankee Obligations (Balanced, Total Return Bond Funds).
These funds may invest in Eurodollar and Yankee obligations. Eurodollar
bank obligations are dollar denominated debt obligations issued outside
the U.S. capital markets by foreign branches of U.S. banks and by foreign
banks. Yankee obligations are dollar denominated obligations issued in
the U.S. capital markets by foreign issuers. Eurodollar (and to a limited
extent, Yankee) obligations are subject to certain sovereign risks. One
such risk is the possibility that a foreign government might prevent
dollar denominated funds from flowing across its borders. Other risks
include: adverse political and economic developments in a foreign country;
the extent and quality of government regulation of financial markets and
institutions; the imposition of foreign withholding taxes; and
expropriation or nationalization of foreign issuers.
Securities of Developing Countries (Diversified Strategic Income and High
Income Funds). These funds may invest in securities of developing (or
"emerging market") countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets
of developing countries involves exposure to economic structures that are
generally less diverse and mature, and to political systems that can be
expected to have less stability, than those of developed countries.
Historical experience indicates that the markets of developing countries
have been more volatile than the markets of the more mature economies of
developed countries.
Foreign Government Securities (Diversified Strategic Income fund and High
Income Fund). Among the foreign government securities in which the fund may
invest are those issued by countries with developing economies, i.e.,
countries in the initial stages of their industrialization cycles.
Investing in securities of countries with developing economies involves
exposure to economic structures that are generally less diverse and less
mature, and to political systems that can be expected to have less
stability, than those of developed countries. The markets of countries with
developing economies historically have been more volatile than markets of
the more mature economies of developed countries, but often have provided
higher rates of return to investors.
Convertible Securities and Synthetic Convertible Securities (Convertible
Fund). Convertible securities are fixed-income securities that may be
converted at either a stated price or stated rate into underlying shares
of common stock. Convertible securities have general characteristics
similar to both fixed-income and equity securities. Although to a lesser
extent than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying
common stock increases, the prices of the convertible securities tend to
rise as a reflection of the value of the underlying common stock. While
no securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common stock of
the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than
common stocks. Of course, like all fixed-income securities, there can be
no assurance of current income because the issuers of the convertible
securities may default on their obligations. Convertible securities,
however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing
fixed income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. However, there can be no
assurance of capital appreciation because securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
nonconvertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior to common
stock of the same issuer. Because of the subordination feature, however,
convertible securities typically have lower ratings than similar
non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic
convertible securities are created by combining non-convertible bonds or
preferred stocks with warrants or stock call options. The options that
will form elements of synthetic convertible securities will be listed on a
securities exchange or on the National Association of Securities Dealers
Automated Quotation System. The two components of a synthetic convertible
security, which will be issued with respect to the same entity, generally
are not offered as a unit, and may be purchased and sold by the Fund at
different times. Synthetic convertible securities differ from convertible
securities in certain respects, including that each component of a
synthetic convertible security has a separate market value and responds
differently to market fluctuations. Investing in synthetic convertible
securities involves the risk normally involved in holding the securities
comprising the synthetic convertible security.
Temporary Investments (Balanced, Convertible, Diversified Strategic
Income, High Income, Municipal High Income and Total Return Bond Funds).
When SSB Citi believes that market conditions warrant, these funds may adopt a
temporary defensive posture and may invest in short-term instruments
without limitation. Short-term instruments in which the funds may invest
(except for Municipal High Income, as described below) include: U.S.
government securities; certain bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic or foreign
banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or
an equivalent rating by any other NRSRO or, if unrated, of an issuer
having an outstanding, unsecured debt issue then rated within the three
highest rating categories; and repurchase agreements with respect to
securities in which a fund may invest.
When Municipal High Income Fund is maintaining a defensive position it may
invest in Temporary Investments consisting of: (a) the following tax-exempt
securities: (i) tax-exempt notes of municipal issuers having, at the time
of purchase, a rating of MIG 1 through MIG 4 by Moody's or rated SP-1 or
SP-2 by S&P or, if not rated, of issuers having an issue of outstanding
Municipal Securities rated within the four highest grades by Moody's or
S&P; (ii) tax-exempt commercial paper having a rating not lower than A-2 by
S&P or Prime-2 by Moody's at the time of purchase; and (iii) variable-rate
demand notes rated within the two highest ratings by any major rating
service, or determined to be of comparable quality to instruments with such
rating, at the time of purchase; and (b) the following taxable securities:
(i) U.S. government securities, including repurchase agreements with
respect to such securities; (ii) other debt securities rated within the
four highest grades by Moody's or S&P; (iii) commercial paper rated in the
highest grade by either of these rating services; and (iv) CDs of domestic
banks with assets of $1 billion or more. Among the tax-exempt notes in
which the fund may invest are Tax Anticipation Notes, Bond Anticipation
Notes and Revenue Anticipation Notes, which are issued in anticipation of
receipt of tax funds, proceeds of bond placements or other revenues,
respectively. At no time will more than 20% of the fund's total assets be
invested in Temporary Investments unless the fund has adopted a defensive
investment policy in anticipation of a market decline. The fund, however,
intends to purchase tax-exempt Temporary Investments pending the investment
of the proceeds of the sale of shares of the fund and of its portfolio
securities, or in order to have highly liquid securities available to meet
anticipated redemptions.
Short Sales Against the Box (Convertible and Balanced Funds). These funds
may enter into a short sale of common stock such that, when the short
position is open, the fund involved owns an equal amount of preferred
stocks or debt securities convertible or exchangeable without payment of
further consideration into an equal number of shares of the common stock
sold short. A fund will enter into this kind of short sale,, described as
"against the box," for the purpose of receiving a portion of the interest
earned by the executing broker from the proceeds of the sale. The proceeds
of the sale will be held by the broker until the settlement date, when the
fund delivers the convertible securities to close out its short position.
Although a fund will have to pay an amount equal to any dividends paid on
the common stock sold short prior to delivery, it will receive the
dividends from the preferred stock or interest from the debt securities
convertible into the stock sold short, plus a portion of the interest
earned from the proceeds of the short sale. The funds will deposit, in a
segregated account with their custodian, convertible preferred stock or
convertible debt securities in connection with short sales against the box
Short Sales (Balanced Fund). In addition to selling securities short
"against the box" (described above) Balanced Fund may, from time to time,
sell securities short but the value of securities sold short will not
exceed 5% of the value of the fund's net assets . In addition, the fund may
not (a) sell short the securities of a single issuer to the extent of more
than 2% of the value of the fund's net assets or (b) sell short the
securities of any class of an issuer to the extent of more than 2% of the
outstanding securities of the class at the time of the transaction. A short
sale is a transaction in which the fund sells securities that it does not
own (but has borrowed) in anticipation of a decline in the market price of
the securities.
When the fund makes a short sale, the proceeds it receives from the sale
are retained by a broker until the fund replaces the borrowed securities.
To deliver the securities to the buyer, the fund must arrange through a
broker to borrow the securities and, in so doing, the fund becomes
obligated to replace the securities borrowed at their market price at the
time of replacement, whatever that price may be. The fund may have to pay a
premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. government securities, equity securities or debt
securities of any grade, providing such securities have been determined by
SSB Citi to be liquid and unencumbered and are marked to market daily pursuant
to guidelines established by the trustees. In addition, the fund will place
in a segregated account with its custodian an amount of cash or U.S.
government securities equal to the difference, if any, between the market
value of the securities at the time they were sold short and the value of
any assets deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it
replaces the borrowed securities, the fund will maintain the segregated
account daily such that the amount deposited in the account plus the amount
deposited with the broker, not including the proceeds from the short sale,
will equal the current market value of the securities sold short and will
not be less than the market value of the securities at the time they were
sold short.
Rule 144A Securities (Balanced, Exchange Reserve and Convertible Funds).
These funds may purchase Rule 144A Securities, which are unregistered
securities restricted to purchase by "qualified institutional buyers"
pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid
market may exist among such buyers. The board of trustees has adopted
guidelines and delegated to SSB Citi the daily function of determining and
monitoring liquidity of Rule 144A Securities. However, the board of
trustees maintains sufficient oversight and is ultimately responsible for
the liquidity determinations. Investments in restricted securities such
as Rule 144A Securities could have the effect of increasing the level of
illiquidity in the fund to the extent that there is temporarily no market
for these securities among qualified institutional buyers.
Real Estate Investment Trusts (Balanced, Convertible and Diversified
Strategic Income Funds). These funds may invest in real estate investment
trusts ("REITs"). REITs are pooled investment vehicles that invest
primarily in either real estate or real estate related loans. The value
of the REIT is affected by changes in the value of the properties owned by
the REIT or security mortgage loans held by the REIT. REITS are dependent
upon cash flow from its investments to repay financing costs and the
management skill of the REIT's manager. REITS are also subject to risks
generally associated with investments in real estate.
Restricted and Illiquid Securities (All funds.) Each fund may invest up
to 15% (except for Exchange Reserve Fund and Municipal High Income Fund,
each of which may invest up to 10%) of its total assets in securities with
contractual or other restrictions on resale and other instruments that are
not readily marketable, including (a) repurchase agreements with
maturities greater than seven days, (b) futures contracts and related
options (and with respect to Municipal High Income Fund, certain variable
rate demand notes) for which a liquid secondary market does not exist and
(c) time deposits maturing in more than seven calendar days (except for
Exchange Reserve Fund, time deposits maturing in two business days to six
months, and for Municipal High Income Fund, time deposits maturing in two
business days to seven calendar days). The above restriction does not
apply to Rule 144A Securities. In addition, each 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. Each fund also may borrow from banks
for temporary or emergency purposes, but not for investment purposes, in
an amount up to 10% of its total assets (except that Total Return Bond
Fund [and Balanced Fund] may invest up to 33% of its total assets) and may
pledge its assets to the same extent in connection with such borrowings.
Whenever these borrowings exceed 5% of the value of the fund's total
assets, the fund will not make any additional investments. Immediately
after any borrowing (including reverse repurchase agreements and forward
roll transactions) by the Diversified Strategic Income Fund, that fund
will maintain an asset cover age of at least 300% with respect to all of
its borrowings. Not withstanding the foregoing, Total Return Bond Fund
shall not invest more that 10% of its net assets in securities that are
restricted, excluding Rule 144A Securities.
The sale of securities that are not publicly traded is typically
restricted under the federal securities laws. As a result, a fund may be
forced to sell these securities at less than fair market value or may not
be able to sell them when SSB Citi believes it desirable to do so. The funds'
investments in illiquid securities are subject to the risk that should the
fund desire to sell any of these securities when a ready buyer is not
available at a price that the fund deems representative of their value,
the value of the fund's net assets could be adversely affected.
RISK FACTORS
The following risk factors are intended to supplement the risks described
above and those in the funds' prospectuses.
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that each fund's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions.
Warrants. Because a warrant does not carry with it the right to dividends
or voting rights with respect to the securities that the warrant holder is
entitled to purchase, and because a warrant does not represent any rights
to the assets of the issuer, a warrant may be considered more speculative
than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying
security and a warrant ceases to have value if it is not exercised prior
to its expiration date. The investment in warrants, valued at the lower
of cost or market, may not exceed 5% of the value of the fund's net
assets. Included within that amount, but not to exceed 2% of the value of
the fund's net assets, may be warrants that are not listed on the NYSE or
the American Stock Exchange. Warrants acquired by the fund in units or
attached to securities may be deemed to be without value.
Securities of Unseasoned Issuers. Securities in which the funds may
invest may have limited marketability and, therefore, may be subject to
wide fluctuations in market value. In addition, certain securities may be
issued by companies that lack a significant operating history and are
dependent on products or services without an established market share.
Fixed Income Securities. Investments in fixed income securities may
subject the funds 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 a
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.
Lower Rated Fixed Income Securities. Securities which are rated BBB by
S&P or Baa by Moody's are generally regarded as having adequate capacity
to pay interest and repay principal, but may have some speculative
characteristics. Securities rated below Baa by Moody's or BBB by S&P may
have speculative characteristics, including the possibility of default or
bankruptcy of the issuers of such securities, market price volatility
based upon interest rate sensitivity, questionable creditworthiness and
relative liquidity of the secondary trading market. Because high yield
bonds have been found to be more sensitive to adverse economic changes or
individual corporate developments and less sensitive to interest rate
changes than higher-rated investments, an economic downturn could disrupt
the market for high yield bonds and adversely affect the value of
outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of
high yield bonds may exercise redemption or call provisions, which may
force a fund, to the extent it owns such securities, to replace those
securities with lower yielding securities. This could result in a
decreased return.
Repurchase Agreements. The fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and
the fund is delayed or prevented from exercising its rights to dispose of
the underlying securities, including 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 a
part of the income from the agreement.
Foreign Securities. Investments in securities of foreign issuers involve
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include fluctuations in foreign exchange
rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Since each fund will invest heavily in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will, to the extent the fund does not
adequately hedge against such fluctuations, affect the value of securities
in its portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign
securities markets, while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their price more volatile than
securities of comparable U.S. companies. Transaction costs on foreign
securities markets are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers
and issuers than there is in the U.S. A fund might have greater difficulty
taking appropriate legal action in foreign courts. Dividend and interest
income from foreign securities will generally be subject to withholding
taxes by the country in which the issuer is located and may not be
recoverable by the fund or the investors. Capital gains are also subject
to taxation in some foreign countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which
can be volatile. Accordingly, changes in the value of the currency in
which a fund's investments are denominated relative to the U.S. dollar
will affect the fund's net asset value. Exchange rates are generally
affected by the forces of supply and demand in the international currency
markets, the relative merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign governments and
central banks. However, currency exchange rates may fluctuate based on
factors intrinsic to a country's economy. Some emerging market countries
also may have managed currencies, which are not free floating against the
U.S. dollar. In addition, emerging markets are subject to the risk of
restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the
currencies in which a fund's securities are quoted would reduce the fund's
net asset value per share.
Special Risks of Countries in the Asia Pacific Region. Certain of the
risks associated with international investments are heightened for
investments in these countries. For example, some of the currencies of
these countries have experienced devaluations relative to the U.S. dollar,
and adjustments have been made periodically in certain of such currencies.
Certain countries, such as Indonesia, face serious exchange constraints.
Jurisdictional disputes also exist, for example, between South Korea and
North Korea. In addition, Hong Kong reverted to Chinese administration on
July 1, 1997. The long-term effects of this reversion are not known at
this time.
Securities of Developing/Emerging Markets Countries. A developing or
emerging markets country generally is considered to be a country that is
in the initial stages of its industrialization cycle. Investing in the
equity markets of developing countries involves exposure to economic
structures that are generally less diverse and mature, and to political
systems that can be expected to have less stability, than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of the more
mature economies of developed countries; however, such markets often have
provided higher rates of return to investors.
One or more of the risks discussed above could affect adversely the
economy of a developing market or a fund's investments in such a market.
In Eastern Europe, for example, upon the accession to power of Communist
regimes in the past, the governments of a number of Eastern European
countries expropriated a large amount of property. The claims of many
property owners against those of governments may remain unsettled. There
can be no assurance that any investments that a fund might make in such
emerging markets would not be expropriated, nationalized or otherwise
confiscated at some time in the future. In such an event, the fund could
lose its entire investment in the market involved. Moreover, changes in
the leadership or policies of such markets could halt the expansion or
reverse the liberalization of foreign investment policies now occurring in
certain of these markets and adversely affect existing investment
opportunities.
Many of a fund's investments in the securities of emerging markets may be
unrated or rated below investment grade. Securities rated below investment
grade (and comparable unrated securities) are the equivalent of high
yield, high risk bonds, commonly known as "junk bonds." Such securities
are regarded as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligations and involve major risk exposure to adverse business,
financial, economic, or political conditions.
Derivative Instruments. In accordance with its investment policies, each
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 transactions. 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 a 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 Risks of Writing Options. Option writing for the fund may be
limited by position and exercise limits established by national securities
exchanges and by requirements of the Code for qualification as a regulated
investment company. In addition to writing covered call options to
generate current income, the fund may enter into options transactions as
hedges to reduce investment risk, generally by making an investment
expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss on a portfolio position with a gain on
the hedge position; at the same time, however, a properly correlated hedge
will result in a gain on the portfolio position being offset by a loss on
the hedge position. The fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge.
The fund will engage in hedging transactions only when deemed advisable by
SSB Citi. Successful use by the fund of options will be subject to SSB Citi'
ability to predict correct movements in the direction of the stock or
index underlying the option used as a hedge. Losses incurred in hedging
transactions and the costs of these transactions will affect the fund's
performance.
The ability of the fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the
fund generally will write options only if a liquid secondary market
appears to exist for the options purchased or sold, for some options no
such secondary market may exist or the market may cease to exist. If the
fund cannot enter into a closing purchase transaction with respect to a
call option it has written, the fund will continue to be subject to the
risk that its potential loss upon exercise of the option will increase as
a result of any increase in the value of the underlying security. The
fund could also face higher transaction costs, including brokerage
commissions, as a result of its options transactions.
Special Risks of Using Futures Contracts. The prices of Futures Contracts
are volatile and are influenced by, among other things, 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. A 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. Where
a fund enters into Futures transactions for non-hedging purposes, it will
be subject to greater risks and could sustain losses which are not offset
by gains on other fund assets.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that each fund has sufficient assets to satisfy its obligations
under a Futures Contract, the fund segregates and commits to back the
Futures Contract an amount of cash and liquid securities equal in value to
the current value of the underlying instrument less the margin deposit.
Most U.S. 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.
Year 2000. The investment management services provided to each fund by
SSB Citi depend on the smooth functioning of its computer systems and those of
its service providers. Many computer software systems in use today cannot
recognize the year 2000, but revert to 1900 or some other date, due to the
manner in which dates were encoded and calculated. That failure could have
a negative impact on each fund's operations, including the handling of
securities trades, pricing and account services. SSB Citi has advised each
fund that it has been reviewing all of its computer systems and actively
working on necessary changes to its systems to prepare for the year 2000
and expect that its systems will be compliant before that date. In
addition, SSB Citi has been advised by each fund's custodian, distributor,
transfer agent sub-transfer agent and accounting service agent that they
are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that SSB Citi or any other service
provider will be successful, or that interaction with other non-complying
computer systems will not impair fund services at that time.
Portfolio Turnover. Each fund may purchase or sell securities without
regard to the length of time the security has been held and thus may
experience a high rate of portfolio turnover. A 100% turnover rate would
occur, for example, if all the securities in a portfolio were replaced in
a period of one year. A fund may experience a high rate of portfolio
turnover if, for example, it writes a substantial number of covered call
options and the market prices of the underlying securities appreciate. The
rate of portfolio turnover is not a limiting factor when the SSB Citi deems it
desirable to purchase or sell securities or to engage in options
transactions. High portfolio turnover involves correspondingly greater
transaction costs, including any brokerage commissions, which are borne
directly by the respective fund and may increase the recognition of short-
term, rather than long-term, capital gains if securities are held for one
year or less and may be subject to applicable income taxes.
Investment Restrictions
The trust has adopted investment restrictions 1 through 8 below as
fundamental policies with respect to the funds, which, under the terms of
the 1940 Act, may not be changed without the vote of a majority of the
outstanding voting securities of a fund. A "majority" is defined in the
1940 Act as the lesser of (a) 67% or more of the shares present at a
shareholder meeting, if the holders of more than 50% of the outstanding
shares of the trust are present or represented by proxy, or (b) more than
50% of the outstanding shares. Investment restrictions 9 through 16 may be
changed by vote of a majority of the board of trustees at any time.
The investment policies adopted by the trust prohibit a fund from:
1. Investing in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Investing in "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
3. Investing more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities of
the U.S. government (including its agencies and instrumentalities)
and securities of state or municipal governments and their
political subdivisions are not considered to be issued by members
of any industry.
4. Borrowing money, except that (a) the fund may borrow from banks
for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise require
the untimely disposition of securities, and (b) the fund may to
the extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that
it engages in transactions described in (a) and (b), the fund will
be limited so that no more than 33-1/3% of the value of its total
assets (including the amount borrowed), valued at the lesser of
cost or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made, is derived
from such transaction.
5. Purchasing securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales
of portfolio securities) or sell any securities short (except
"against the box" and for the Balanced Fund which may make short
sales or maintain a short position to the extent of 5% of its net
assets). For purposes of this restriction the deposit or payment
by the fund of underlying securities and other assets in escrow
and collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related options
and options on securities, indexes or similar items is not
considered to be the purchase of a security on margin.
6. Making Loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objective and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
7. Underwriting securities issued by other persons, except to the
extent that the fund may technically be deemed an underwriter
under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
8. Purchasing or selling real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall not
prevent the fund from (a) investing in securities of issuers
engaged in the real estate business or the business of investing
in real estate (including interests in limited partnerships owning
or otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent with the
fund's investment objective and policies); (d) investing in real
estate investment trust securities; or (e) investing in gold
bullion and coins or receipts for gold.
9. Investing in oil, gas or other mineral exploration or development
programs, except that the Convertible, Diversified Strategic
Income, Balanced and High Income Funds may invest in the
securities of companies that invest in or sponsor those programs.
10. Writing or selling puts, calls, straddles, spreads or combinations
thereof, except, with respect to funds other than Exchange Reserve
Fund, as permitted under the fund's investment objective and
policies.
11. With respect to all funds except the Exchange Reserve Fund and
Municipal High Income 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 15% or, in
the case of the Municipal High Income and Exchange Reserve Funds,
10% of the total assets of the fund would be invested in such
securities. With respect to the Exchange Reserve Fund, securities
subject to Rule 144A of the 1933 Act (provided at least two
dealers make a market in such securities) and certain privately
issued commercial paper eligible for resale without registration
pursuant to Section 4(2) of the 1933 Act will not be subject to
this restriction
12. Purchasing any security if as a result the fund would then have
more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years; provided that, in the case
of private activity bonds purchased for Municipal High Income
Fund, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid.
13. Making investments for the purpose of exercising control or
management.
14. Purchasing or retaining securities of any company if, to the
knowledge of the trust, any of the trust's officers or trustees or
any officer or director of SSB Citi individually owns more than 1/2 of
1% of the outstanding securities of such company and together they
own beneficially more than 5% of the securities.
15. Investing in warrants other than those acquired by the fund as
part of a unit or attached to securities at the time of purchase
(except as permitted under a fund's investment objective and
policies) if, as a result, the investments (valued at the lower of
cost or market) would exceed 5% of the value of the fund's net
assets. At no time may more than 2% of the fund's net assets be
invested in warrants not listed on a recognized U.S. or foreign
stock exchange, to the extent permitted by applicable state
securities laws.
16. With respect to Balanced Fund, purchasing in excess of 5% of the
voting securities of a public utility or public utility holding
company, so as to become a public utility holding company as
defined in the Public Utility Holding Company Act of 1935, as
amended.
The trust has adopted two additional investment restrictions applicable to
Exchange Reserve Fund, the first of which is a fundamental policy, which
prohibit the fund from:
1. Investing in common stocks, preferred stocks, warrants, other
equity securities, corporate bonds or debentures, state bonds,
municipal bonds or industrial revenue bonds.
2. Investing more than 10% of its assets in variable rate master
demand notes providing for settlement upon more than seven days'
notice by the fund.
Portfolio Turnover
The funds do not intend to seek profits through short-term trading.
Nevertheless, the funds will not consider portfolio turnover rate a
limiting factor in making investment decisions.
Under certain market conditions, a fund authorized to engage in
transactions in options may experience increased portfolio turnover as a
result of its investment strategies. For instance, the exercise of a
substantial number of options written by a fund (due to appreciation of the
underlying security in the case of call options on securities or
depreciation of the underlying security in the case of put options on
securities) could result in a turnover rate in excess of 100%. A portfolio
turnover rate of 100% also would occur if all of a fund's securities that
are included in the computation of turnover were replaced once during a
one-year period. A fund's turnover rate is calculated by dividing the
lesser of purchases or sales of its portfolio securities for the year by
the monthly average value of the portfolio securities. Securities or
options with remaining maturities of one year or less on the date of
acquisition are excluded from the calculation.
Certain other practices which may be employed by a fund also could result
in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later
sold. In addition, a security may be sold and another of comparable quality
purchased at approximately the same time to take advantage of what SSB Citi or
a fund's 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 fiscal years ended July 31, 1997, 1998 and 1999, the portfolio
turnover rates were as follows:
For the Fiscal Year Ended
July 31:
Fund
1997
1998
1999
Convertible Fund
57%
49%
%
Diversified Strategic
Income Fund
85
128
High Income Fund
78
102
Municipal High Income
Fund
51
84
Total Return Bond Fund
N/A
0
Balanced Fund
45
110
For regulatory purposes, the turnover rate of Exchange Reserve Fund is
zero.
Portfolio Transactions
Most of the purchases and sales of securities by a fund, whether transacted
on a securities exchange or over the counter, will be made in the primary
trading market for the securities, except for Eurobonds which are
principally traded over the counter. The primary trading market for a given
security is generally located in the country in which the issuer has its
principal office. Decisions to buy and sell securities for a fund are made
by SSB Citi, who is also responsible for placing these transactions subject to
the overall review of the board of trustees. With respect to Diversified
Strategic Income Fund, decisions to buy and sell domestic securities for
the fund are made by SSB Citi, which is also responsible for placing these
transactions; the responsibility to make investment decisions with respect
to foreign securities and to place these transactions rests with Global
Capital Management. With respect to Convertible Fund, day-to-day investment
decisions are made by SBAM, subject to the supervision of SSB Citi. Although
investment decisions for each fund are made independently from those of the
other accounts managed by SSB Citi, investments of the type that the fund may
make also may be made by those other accounts. When a fund and one or more
other accounts managed by SSB Citi 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 SSB Citi or a fund's sub-
investment adviser to be equitable to each. In some cases this procedure
may adversely affect the price paid or received by a fund, or the size of
the position obtained or disposed of by the fund.
Transactions on domestic stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most foreign
exchanges. There is generally no stated commission in the case of
securities traded in U.S. or foreign over-the-counter markets, but the
prices of those securities include undisclosed commissions or mark-ups. The
cost of securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased
from and sold to dealers include a dealer's mark-up or mark-down. U.S.
government securities generally are purchased from underwriters or dealers,
although certain newly issued U.S. government securities may be purchased
directly from the United States Treasury or from the issuing agency or
instrumentality. The following table sets forth certain information
regarding each fund's payment of brokerage commissions:
Total Brokerage Commissions Paid
Fiscal
Year
Convertib
le Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1997
- --
- --
$
138,150
- --
N/A
1998
$23,753
$34,725
$2,187,80
5
$20,200
- --
1999
Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Convertib
le Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1997
- --
- --
138,150
- --
N/A
1998
- --
- --
139,236
- --
- --
1999
% of Total Brokerage Commissions Paid to Salomon Smith Barney
Fiscal
Year
Convertib
le Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1997
- --
- --
6.60%
- --
N/A
1998
- --
- --
6.36
- --
- --
1999
% of Total Dollar Amount of Transactions Involving Commissions Paid to
Salomon Smith Barney
Fiscal
Year
Convertib
le Fund
High
Income
Fund
Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1997
- --
- --
5.85%
- --
N/A
1998
- --
- --
6.54%
- --
- --
1999
In selecting brokers or dealers to execute securities transactions on
behalf of a fund, SSB Citi seeks the best overall terms available. In assessing
the best overall terms available for any transaction, SSB Citi will consider
the factors that it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, each advisory agreement between the trust and SSB Citi authorizes
SSB Citi, in selecting brokers or dealers to execute a particular transaction
and in evaluating the best overall terms available, to consider the
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934, as amended) provided to the
trust, the other funds and/or other accounts over which SSB Citi or its
affiliates exercise investment discretion. The fees under the advisory
agreements and the Sub-Advisory and/or administration agreements are not
reduced by reason of their receiving such brokerage and research services.
Further, Salomon Smith Barney will not participate in commissions brokerage
given by the fund to other brokers or dealers and will not receive any
reciprocal brokerage business resulting therefrom. The trust's board of
trustees periodically will review the commissions paid by the funds to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the trust.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC thereunder, the board of trustees
has determined that transactions for a fund may be executed through Salomon
Smith Barney and other affiliated broker-dealers if, in the judgment of
SSB Citi, the use of such broker-dealer is likely to result in price and
execution at least as favorable as those of other qualified broker-dealers,
and if, in the transaction, such broker-dealer charges the fund a rate
consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, under rules recently adopted by the SEC,
Salomon Smith Barney may directly execute such transactions for the funds
on the floor of any national securities exchange, provided (a) the trust's
board of trustees has expressly authorized Salomon Smith Barney to effect
such transactions, and (b) Salomon Smith Barney annually advises the trust
of the aggregate compensation it earned on such transactions. Over-the-
counter purchases and sales are transacted directly with principal market
makers except in those cases in which better prices and executions may be
obtained elsewhere. The funds will not purchase any security, including
U.S. government securities or Municipal Securities, during the existence of
any underwriting or selling group relating thereto of which Salomon Smith
Barney is a member, except to the extent permitted by the SEC.
The funds may use Salomon Smith Barney as a commodities broker in
connection with entering into futures contracts and options on futures
contracts. Salomon Smith Barney has agreed to charge the funds commodity
commissions at rates comparable to those charged by Salomon Smith Barney to
its most favored clients for comparable trades in comparable accounts.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for purchase. See the
prospectus for a discussion of factors to consider in selecting which
Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge
as follows:
Sales Charge
(Diversified Strategic Income, High Income, Municipal High Income and Total
Return Bond Funds)
Amount of
Investment
% of Offering
Price
% of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.50%
4.71%
4.00%
$25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000-249,999
2.50
2.56
2.25
250,000-499,999
1.50
1.52
1.35
500,000 - and
over
*
*
*
Sales Charge
(Balanced and Convertible Funds)
Amount of
Investment
% of Offering
Price
% of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
5.00%
5.26%
4.50%
$25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000-249,999
3.00
3.09
2.70
250,000-499,999
2.00
2.04
1.80
500,000 - and
over
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase. The
CDSC on Class A shares is payable to Smith Barney, which compensates
Salomon Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more.
The CDSC is waived in the same circumstances in which the CDSC applicable
to Class B and Class L shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the fund as defined in the 1933 Act.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the fund made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or
other fiduciary of a single trust estate or single fiduciary account.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a deferred sales charge payable upon certain
redemptions. See "Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to
a deferred sales charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below. Until June 22, 2001 purchases of Class L
shares by investors who were holders of Class C shares of the fund on June
12, 1998 will not be subject to the 1% initial sales charge.
Class O Shares. Class O shares are sold without an initial sales charge
or deferred sales charge and are available only to existing Class O
shareholders.
Class Y Shares. 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 (except for purchases of Class Y shares (i) of the
International Equity Portfolio, for which the minimum initial investment
is $5,000,000 and (ii) by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount).
General
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a broker that clears through Salomon Smith Barney ("Dealer
Representative"). In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer Representatives, may
purchase shares directly from the fund. When purchasing shares of the
fund, investors must specify whether the purchase is for Class A, Class B,
Class L or Class Y shares. Salomon Smith Barney and Dealer
Representatives may charge their customers an annual account maintenance
fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data Investor
Services Group, Inc. ("First Data" or "transfer agent") are not subject to
a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in
the fund by making an initial investment of at least $1,000 for each
account, or $250 for an IRA or a Self-Employed Retirement Plan, in the
fund. Investors in Class Y shares may open an account by making an initial
investment of $15,000,000. Subsequent investments of at least $50 may be
made for all Classes. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(c) of the Code, the minimum initial
investment required for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes in the fund is $25. For
shareholders purchasing shares of the fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class L shares and subsequent
investment requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment required for Class A,
Class B and Class L shares and the subsequent investment requirement for
all Classes is $50. There are no minimum investment requirements for
Class A shares for employees of Citigroup Inc. ("Citigroup") and its
subsidiaries, including Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT") sponsored by Salomon
Smith Barney, and Directors/Trustees of any of the Smith Barney Mutual
Funds, and their spouses and children. The fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
Purchase orders received by the fund or a Salomon Smith Barney Financial
Consultant 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 a Dealer Representative prior to the
close of regular trading on the NYSE on any day the fund calculates its
net asset value, are priced according to the net asset value determined on
that day, provided the order is received by the fund or the fund's agent
prior to its close of business. For shares purchased through Salomon Smith
Barney or a Dealer Representative purchasing through Salomon Smith Barney,
payment for 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 First Data is authorized through preauthorized transfers
of at least $25 on a monthly basis or at least $50 on a quarterly basis to
charge the shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the shareholder's fund
account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon Smith Barney or
First Data. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon Smith Barney
brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information
is available from the fund or a Salomon Smith Barney Financial Consultant
or a Dealer Representative.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A shares may be made at
net asset value without a sales charge in the following circumstances: (a)
sales to (i) Board Members and employees of Citigroup and its subsidiaries
and any Citigroup affiliated funds including the Smith Barney Mutual Funds
(including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of
Securities Dealers, Inc., provided such sales are made upon the assurance
of the purchaser that the purchase is made for investment purposes and
that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company
to effect the combination of such company with the fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Salomon Smith Barney Financial Consultant (for
a period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a
mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and
(iii) was subject to a sales charge; (d) purchases by shareholders who
have redeemed Class A shares in the fund (or Class A shares of another
Smith Barney Mutual Fund that is offered with a sales charge) and who wish
to reinvest their redemption proceeds in the fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of Citigroup or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k) Program
(Note: subsequent investments will be subject to the applicable sales
charge); (g) purchases by a separate account used to fund certain
unregistered variable annuity contracts; (h) investments of distributions
from a UIT sponsored by Salomon Smith Barney; (i) purchases by investors
participating in a Salomon Smith Barney fee-based arrangement; and (j)
purchases by Section 403(b) or Section 401(a) or (k) accounts associated
with Copeland Retirement Programs. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase would qualify for the elimination of
the sales charge.
Right of Accumulation. Class A shares of the fund may be purchased by
''any person'' (as defined above) at a reduced sales charge or at net
asset value determined by aggregating the dollar amount of the new
purchase and the total net asset value of all Class A shares of the fund
and of most other Smith Barney Mutual Funds that are offered with a sales
charge then held by such person and applying the sales charge applicable
to such aggregate. In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge.
The right of accumulation is subject to modification or discontinuance at
any time with respect to all shares purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent for an amount of
$50,000 or more provides an opportunity for an investor to obtain a
reduced sales charge by aggregating investments over a 13 month period,
provided that the investor refers to such Letter when placing orders. For
purposes of a Letter of Intent, the ''Amount of Investment'' as referred
to in the preceding sales charge table includes (i) all Class A shares of
the fund and other Smith Barney Mutual Funds offered with a sales charge
acquired during the term of the letter plus (ii) the value of all Class A
shares previously purchased and still owned. Each investment made during
the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. The term of the
Letter will commence upon the date the Letter is signed, or at the options
of the investor, up to 90 days before such date. Please contact a Salomon
Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent may also be used as
a way for investors to meet the minimum investment requirement for Class Y
shares (except purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount).
For each fund, investors must make an initial minimum purchase of
$5,000,000 in Class Y shares of the fund and agree to purchase a total of
$15,000,000 of Class Y shares of the fund within 13 months from the date
of the Letter. If a total investment of $15,000,000 is not made within the
13-month period, all Class Y shares purchased to date will be transferred
to Class A shares, where they will be subject to all fees (including a
service fee of 0.25%) and expenses applicable to the fund's Class A
shares, which may include a deferred sales charge of 1.00%. Please contact
a Salomon Smith Barney Financial Consultant or First Data for further
information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial
sales charge but are subject to a deferred sales charge. A deferred sales
charge may be imposed on certain redemptions of these shares.
Any applicable deferred sales charge 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 that the value of such shares represents: (a) capital appreciation
of fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more
than five years after their purchase; or (d) with respect to Class L
shares and Class A shares that are Deferred Sales Charge Shares, shares
redeemed more than 12 months after their purchase.
Class L 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 Smith
Barney 401(k) Program, as described below. See ''Purchase of Shares-Smith
Barney 401(k) and ExecChoiceTM Programs.''
Year Since
Purchase Payment
Was Made
CDSC
(Diversified Strategic Income,
High Income, Municipal High Income
and Total Return Bond Funds)
(Balanced and
Convertible Funds)
First
4.50%
5.00%
Second
4.00
4.00
Third
3.00
3.00
Fourth
2.00
2.00
Fifth
1.00
1.00
Sixth and
thereafter
0.00
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 (Class B shares that were
acquired through the reinvestment of dividends and distributions) 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.
The length of time that Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the
amount of the deferred sales charge will reduce the gain or increase the
loss, as the case may be, on the amount realized on 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'')
(provided, however, that automatic cash withdrawals in amounts equal to or
less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7,
1994); (c) redemptions of shares within 12 months following the death or
disability of the shareholder; (d) redemptions of shares made in
connection with qualified distributions from retirement plans or IRAs upon
the attainment of age 591/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the fund with any
investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other Smith Barney
Mutual Funds may, under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit for any
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 First Data in the case of all other
shareholders) of the shareholder's status or holdings, as the case may be.
Smith Barney 401(k) and ExecChoiceTM Programs
Investors may be eligible to participate in the Smith Barney 401(k)
Program or the Smith Barney ExecChoiceTM Program. To the extent
applicable, the same terms and conditions, which are outlined below, are
offered to all plans participating (''Participating Plans'') in these
programs.
The fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoiceTM
Programs. Class A and Class L shares acquired through the Participating
Plans are subject to the same service and/or distribution fees as the
Class A and Class L shares acquired by other investors; however, they are
not subject to any initial sales charge or 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 Shares. Class L 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 shares of one or more funds of the Smith
Barney Mutual Funds.
401(k) and ExecChoiceTM Plans Opened On or After June 21, 1996. If, at
the end of the fifth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program or the Smith Barney ExecChoiceTM
Program, a Participating Plan's total Class L and Class O holdings in all
non-money market Smith Barney Mutual Funds equal at least $1,000,000, the
Participating Plan will be offered the opportunity to exchange all of its
Class L shares for Class A shares of the fund. For Participating Plans
that were originally established through a Salomon Smith Barney retail
brokerage account, the five-year period will be calculated from the date
the retail brokerage account was opened. Such Participating Plans will be
notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not
qualify for the five-year exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if a
Participating Plan's total Class L 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 Class O shares for Class A shares of the fund. Such Plans
will be notified in writing within 30 days after the last business day of
the calendar year and, unless the exchange offer has been rejected in
writing, the exchange will occur on or about the last business day of the
following March.
Any Participating Plan in the Smith Barney 401(k) or the Smith Barney
ExecChoiceTM Programs, whether opened before or after June 21, 1996, that
has not previously qualified for an exchange into Class A shares will be
offered the opportunity to exchange all of its Class L shares for Class A
shares of the fund, regardless of asset size, at the end of the eighth
year after the date the Participating Plan enrolled in the Smith Barney
401(k) 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 shares of the fund, but instead may acquire
Class A shares of the fund. Any Class L shares not converted will continue
to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the fund through the
Smith Barney 401(k) Program or the Smith Barney ExecChoiceTM Program must
purchase such shares directly from the transfer agent. For further
information regarding these Programs, investors should contact a Salomon
Smith Barney Financial Consultant.
REDEMPTION OF SHARES
General.
Each fund is required to redeem the shares tendered to it, as described
below, at a redemption price equal to their net asset value per share next
determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset
value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of
the Class than specified, the redemption request will be delayed until
First Data receives further instructions from Salomon Smith Barney, or if
the shareholder's account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be remitted on or
before the third business day following receipt of proper tender, except
on 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 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 fifteen 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 Income Funds
Name of Fund (please specify)
Class A, B, L, O or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, RI 02940-9699
A written redemption request must (a) state the name of the Fund for which
you are redeeming shares, (b) state the Class and number or dollar amount
of shares to be redeemed, (c) identify the shareholder' s account number
and (d) be signed by each registered owner exactly as the shares are
registered. If the shares to be redeemed were issued in certificate form,
the certificates must be endorsed for transfer (or be accompanied by an
endorsed stock power) and must be submitted to First Data together with
the redemption request. Any signature appearing on a share certificate,
stock power or written redemption request in excess of $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. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees
or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
Automatic Cash Withdrawal Plan.
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of a Fund as may be necessary
to cover the stipulated withdrawal payment. Any applicable CDSC will not
be waived on amounts withdrawn by shareholders that exceed 1.00% per month
of the value of a shareholder's shares at the time the Withdrawal Plan
commences. To the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in a 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. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in the Fund
at the same time that he or she is participating in the Withdrawal Plan,
purchases by such shareholders in amounts of less than $5,000 will not
ordinarily be permitted. The withdrawal plan will be carried over on
exchanges between funds or classes of a Fund.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with First Data as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are automatically
reinvested at net asset value in additional shares of the Company.
Withdrawal Plans should be set up with a Salomon Smith Barney Financial
Consultant. A shareholder who purchases shares directly through First
Data may continue to do so and applications for participation in the
Withdrawal Plan must be received by First Data no later than the eighth
day of the month to be eligible for participation beginning with that
month's withdrawal. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Salomon Smith Barney
Financial Consultant.
Telephone Redemption and Exchange Program.
Shareholders who do not have a Salomon Smith Barney brokerage account may
be eligible to redeem and exchange Fund shares by telephone. To determine
if a shareholder is entitled to participate in this program, he or she
should contact First Data at 1-800-451-2010. Once eligibility is
confirmed, the shareholder must complete and return a Telephone/Wire
Authorization Form, along with a signature guarantee that will be provided
by First Data upon request. (Alternatively, an investor may authorize
telephone redemptions on the new account application with the applicant's
signature guarantee when making his/her initial investment in a Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of a Fund's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and
5:00 p.m. (New York City time) on any day the NYSE is open. Redemption
requests received after the close of regular trading on the NYSE are
priced at the net asset value next determined. Redemptions of shares (i)
by retirement plans or (ii) for which certificates have been issued are
not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his/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. Each 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 shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange
requests may be made by calling First Data at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m. (New York City time) on any day on which the NYSE is
open. Exchange requests received after the close of regular trading on
the NYSE are processed at the net asset value next determined.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither a Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. Each 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). Each 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.
Suspension or Postponment
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the NYSE is closed (other than for
customary weekend and holiday closings), (b) when trading in markets a
Fund normally utilizes is restricted, or an emergency as determined by the
SEC exists, so that disposal of the Fund's investments or determination of
net asset value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for the protection of the Fund's
shareholders.
Distributions in Kind
If the board of directors of the Company determines that it would be
detrimental to the best interests of the remaining shareholders of a Fund
to make a redemption payment wholly in cash, the Fund may pay, in
accordance with the SEC rules, any portion of a redemption in excess of
the lesser of $250,000 or 1% of the Fund's net assets by a distribution in
kind of portfolio securities in lieu of cash. Shareholders should expect
to incur brokerage costs when subsequently selling shares redeemed in
kind.
EXCHANGE PRIVILEGE
General
Except as noted below, shareholders of any fund of the Smith Barney mutual
funds may exchange all or part of their shares for shares of the same
class of other funds of the Smith Barney mutual funds, to the extent such
shares are offered for sale in the shareholder's state of residence and
provided your registered representative or your investment dealer is
authorized to distribute shares of the fund, on the basis of relative net
asset value per share at the time of exchange. Class B shares of any fund
may be exchanged without a CDSC. Class B shares of the Fund exchanged for
Class B shares of another fund will be subject to the higher applicable
CDSC of the two funds and, for the purposes of calculating CDSC rates and
conversion periods, will be deemed to have been held since the date the
shares being exchanged were deemed to be purchased. Exchanges of Class A,
Class B and Class L shares are subject to minimum investment requirements
and all shares are subject to the other requirements of the fund into
which exchanges are made.
The exchange privilege enables shareholders to acquire shares of the same
class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange,
the shareholder should obtain and review a copy of the current prospectus
of each fund into which an exchange is being considered. Prospectuses may
be obtained from a Salomon Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds are
immediately invested at a price as described above, in shares of the fund
being acquired. Salomon Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at
any time after written notice to shareholders.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares into any of the funds imposing a
higher CDSC than that imposed by the Funds, the exchanged Class B shares
will be subject to the higher applicable CDSC. Upon an exchange, the new
Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be
deemed to have been purchased on the same date as the Class L shares of
the Fund that have been exchanged.
Class A, Class Y and Class O Exchanges. Class A, Class Y and Class O
shareholders of a 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. Class O shares are
offered only in select funds.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to a Fund' s performance and its
shareholders. SSB Citi 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, SSB Citi will notify Smith Barney and Smith
Barney may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, Smith Barney
will provide notice in writing or by telephone to the shareholder at least
15 days prior to suspending the exchange privilege and during the 15-day
period the shareholder will be required to (a) redeem his or her shares in
the Fund or (b) remain invested in the Fund or exchange into any of the
funds of the Smith Barney Mutual Funds listed above, which position the
shareholder would be expected to maintain for a significant period of
time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares-Telephone Redemption and Exchange Program" .
Exchanges will be processed at the net asset value next determined.
Redemption procedures discussed below are also applicable for exchanging
shares, and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of the shares of
the fund being acquired is identical to the registration of the shares of
the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon
the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Company reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
DISTRIBUTOR
CFBDS serves as the trust's distributor on a best efforts basis pursuant to
a distribution agreement (the "Distribution Agreement").
When payment is made by the investor before the settlement date, unless
otherwise directed by the investor, the funds will be held as a free credit
balance in the investor's brokerage account, and Salomon Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment
in a money market fund (other than the Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Salomon Smith Barney to
invest the funds in a Salomon Smith Barney money market fund, the amount of
the investment will be included as part of the average daily net assets of
both the relevant fund and the Salomon Smith Barney money market fund, and
affiliates of Salomon Smith Barney that serve the funds in an investment
advisory or administrative capacity will benefit from the fact they are
receiving fees from both such investment companies for managing these
assets computed on the basis of their average daily net assets. The trust's
board of trustees has been advised of the benefits to Salomon Smith Barney
resulting from these settlement procedures and will take such benefits into
consideration when reviewing the advisory, administration and Distribution
agreements for continuance.
For the fiscal year ended July 31, 1999, Salomon Smith Barney and/or PFS
incurred distribution expenses for advertising, printing and mailing
prospectuses, support services and overhead expenses, to Salomon Smith
Barney or PFS Financial Consultants and for accruals for interest on the
excess of Salomon Smith Barney and/or PFS expenses incurred in the
distribution of the fund's shares over the sum of the distribution fees and
CDSC received by Salomon Smith Barney and/or PFS are expressed in the
following table:
Fund Name
Financial
Consultant
Compensatio
n
Branch
Expenses
Advertisin
g
Expenses
Printin
g
Expense
s
Interes
t
Expense
s
Other
Expenses
Div.
Strat.
Balanced
High
Income
Muni High
Convertibl
e
Ex.
Reserve
Total
Return
Distribution Arrangements
Shares of the trust are sold on a best efforts basis by CFBDS as sales
agent of the trust pursuant to the Distribution Agreement. To compensate
Salomon Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the trust has adopted a services
and distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan, each fund, except Exchange Reserve Fund, pays Salomon
Smith Barney a service fee, accrued daily and paid monthly, calculated at
the annual rate of 0.25% (0.15% in the case of Municipal High Income Fund)
of the value of the fund's average daily net assets attributable to its
Class A, Class B, Class L and Class O shares. In addition, each fund
except the Exchange Reserve Fund, pays Salomon Smith Barney, with respect
to its Class B, Class L and Class O shares, a distribution fee. The
Exchange Reserve Fund pays PFS a distribution fee with respect to its
Class B shares. The distribution fee is primarily intended to compensate
Salomon Salomon Smith Barney and/or PFS for its initial expense of paying
Financial Consultants a commission upon sales of those shares. The Class B
and Class L shares' distribution fees, accrued daily and paid monthly, are
calculated at the annual rate of 0.50% for Class B shares of each fund and
0.45% for Class L shares, except the Smith Barney Balanced Fund and the
Smith Barney Convertible Fund (0.50% for Class L shares in the case of
Exchange Reserve Fund and 0.55% for Class L shares in the case of
Municipal High Fund) of the value of a fund's average daily net assets
attributable to the shares of the respective Class. For the Smith Barney
Convertible Fund and the Smith Barney Balanced Fund, Class L and Class O
shares' distribution fees, accrued daily and paid monthly, are calculated
at the annual rate of 0.75% for Class L shares and 0.45% for Class O
shares.
For the fiscal years ended July 31, 1999, Salomon Smith Barney received
$_______, in the aggregate from the trust under the Plan.
The following expenses were incurred during the periods indicated:
Initial Sales Charges (paid to Salomon Smith Barney).
Class A
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
19,000
$ 19,000
$
Diversified Strategic
Income Fund
983,000
1,344,000
High Income Fund
726,000
1,571,000
Municipal High Income
Fund
46,000
70,000
Total Return Bond Fund
N/A
N/A
Balanced Fund
55,000
68,000
Class L
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
N/A
$2,000
Diversified Strategic
Income Fund
N/A
78,000
High Income Fund
N/A
112,000
Municipal High Income
Fund
N/A
3,000
Total Return Bond Fund
N/A
21,000
Balanced Fund
N/A
4,000
CDSC (paid to Salomon Smith Barney)
Class A
For the Fiscal Year Ended
July 31:
Fund
1998
1999
Convertible Fund
N/A
$
Diversified Strategic Income Fund
23,000
Exchange Reserve Fund
N/A
High Income Fund
12,000
Municipal High Income Fund
N/A
Total Return Bond Fund
1,000
Balanced Fund
N/A
Class B
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
59,000
$
50,000
$
Diversified Strategic
Income Fund
2,858,000
2,494,000
Exchange Reserve Fund
618,000
349,000
High Income Fund
831,000
936,000
Municipal High Income
Fund
535,000
231,000
Total Return Bond Fund
N/A
34,000
Balanced Fund
2,514,000
829,000
Class L
Fund
1998
1999
Convertible Fund
$0
$
Diversified Strategic Income Fund
35,000
Exchange Reserve Fund
N/A
High Income Fund
20,000
Municipal High Income Fund
0
Total Return Bond Fund
20,000
Balanced Fund
0
Class O
For the Fiscal Year Ended
July 31:
Fund
1998
1999
Balanced Fund
$1,000
$
Service Fees and Distribution Fees
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
413,173
$
400,232
Diversified Strategic
Income Fund
19,195,740
19,373,20
3
Exchange Reserve Fund
737,595
543,651
High Income Fund
5,818,152
7,255,916
Municipal High Income Fund
4,316,732
3,724,428
Total Return Bond Fund
N/A
329,050
Balanced Fund
9,205,137
7,016,893
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the board of trustees,
including a majority of the Independent Trustees who have no direct or
indirect financial interest in the operation of the Plan. The Plan may not
be amended to increase the amount to be spent for the services provided by
Salomon Smith Barney or PFS without shareholder approval, and all
amendments of the Plan must be approved by the trustees in the manner
described above. The Plan may be terminated with respect to a Class at any
time, without penalty, by vote of a majority of the Independent Trustees
or, with respect to any fund, by vote of a majority of the outstanding
voting securities of the Class (as defined in the 1940 Act). Pursuant to
the Plan, Salomon Smith Barney and PFS will provide the board of trustees
with periodic reports of amounts expended under the Plan and the purpose
for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE currently
is scheduled to be closed on New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday,
respectively. Because of the differences in distribution fees and Class-
specific expenses, the per share net asset value of each Class may differ.
The following is a description of procedures used by a fund in valuing its
assets.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of the net asset value of
funds investing in foreign securities may not take place contemporaneously
with the determination of the prices of many of their respective portfolio
securities used in such calculation. A security which is listed or traded
on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. All assets and
liabilities initially expressed in foreign currency values will be
converted into U.S. dollar values at the mean between the bid and offered
quotations of such currencies against U.S. dollars as last quoted by any
recognized dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by the trust's board of trustees.
In carrying out the board's valuation policies, SSB Citi, as administrator, may
consult with an independent pricing service (the "Pricing Service")
retained by the trust.
Debt securities of United States issuers (other than U.S. government
securities and short-term investments), including Municipal Securities held
by Municipal High Income Fund, are valued by SSB Citi, 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 trust may quote the funds' yield or total return in
advertisements or in reports and other communications to shareholders. The
trust may include comparative performance information in advertising or
marketing each fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of a fund describes the
expenses or performance of Class A, Class B, Class L, Class O or Class Y,
it will also disclose such information for the other Classes.
Yield
Exchange Reserve Fund. The current yield for the fund is computed by (a)
determining the net change in the value of a hypothetical pre-existing
account in the fund having a balance of one share at the beginning of a
seven-calendar-day period for which yield is to be quoted, (b) dividing the
net change by the value of the account at the beginning of the period to
obtain the base period return and (c) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value
of the account reflects the value of additional shares purchased with
dividends declared on the original share and any such additional shares,
but does not include realized gains and losses or unrealized appreciation
and depreciation. In addition, the fund may calculate a compound effective
annualized yield by adding 1 to the base period return (calculated as
described above), raising the sum to a power equal to 365/7 and subtracting
1.
For the seven-day period ended July 31, 1999 the annualized yield was
_____% and ____% for Class B and Class C shares, respectively. The compound
effective yield was ____% and ____% for Class B and Class C shares,
respectively. As of July 31, 1999, the fund's average portfolio maturity
was ___ days.
Other Funds. The 30-day yield figure of a fund other than Exchange Reserve
Fund is calculated according to a formula prescribed by the SEC. The
formula can be expressed as follows:
YIELD =2[(a-b+1)^6)-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and
reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, a
fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow of
net new money to the fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of such fund's investments, thereby reducing the current yield of
the fund. In periods of rising interest rates, the opposite can be expected
to occur.
Average Annual Total Return
The "average annual total return" figures for each fund, other than
Exchange Reserve Fund, are computed according to a formula prescribed by
the SEC. The formula can be expressed as follows:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV= Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of the 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The average annual total returns with sales charges of the fund's Class A
shares were as follows for the periods indicated:
Fund*
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund
%
%
%
Diversified Strategic
Income Fund
High Income Fund
Municipal High Income Fund
Total Return Bond Fund
Balanced Fund
*Each fund, except Total Return Bond Fund, commenced selling Class A shares
on November 6, 1992. The Total Return Bond Fund commenced operations on
February 27, 1998.
The average annual total returns with CDSC (with fees waived) of the fund's
Class B shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Ten-Year
Period
Since
Inception
Convertible Fund (1)
%
%
%
%
Diversified Strategic Income
Fund (2)(6)
High Income Fund(3)(6)
Municipal High Income
Fund(4)(6)
Total Return Bond Fund(7)
Balanced Fund(5)
(1) Fund commenced operations on September 9, 1986.
(2) Fund commenced operations on December 28, 1989.
(3) Fund commenced operations on September 2, 1986.
(4) Fund commenced operations on September 16, 1985.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992, the maximum CDSC imposed on redemptions was
5.00%.
(7) Fund commenced operations on January 21, 1998.
The average annual total returns with sales charges (with fees waived) of
the fund's Class L shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(3)
%
%
%
Diversified Strategic Income
Fund(5)
High Income Fund(4)
Municipal High Income
Fund(2)
Total Return Bond Fund
Balanced Fund(6)
(1) The fund commenced selling Class L shares (previously designated as
Class C shares) on June 1, 1993.
(2) The fund commenced selling Class L shares (previously designated as
Class C shares) on November 17, 1994.
(3) The fund commenced selling Class L shares on June 15, 1998.
(4) The fund commenced selling Class L shares (previously designated as
Class C shares) on August 24, 1994.
(5) The fund commenced selling Class L shares (previously designated as
Class C shares) on March 19, 1993.
(6) The fund commenced selling Class L shares on June 15, 1998.
The average annual total returns with sales charges (with fees waived) of
the fund's Class O shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
%
%
%
Balanced Fund(2)
(1) The fund commenced selling Class O shares (previously designated as
Class C shares) on November 7, 1994.
(2) The fund commenced selling Class O shares (previously designated as
Class C shares) on February 4, 1993.
The average annual total returns (with fees waived) of the fund's Class Y
shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
%
%
%
Diversified Strategic Income
Fund(2)
High Income Fund(3)
Balanced Fund(4)
(1) The fund commenced selling Class Y shares on February 7, 1996.
(2) The fund commenced selling Class Y shares on October 10, 1995.
(3) The fund commenced selling Class Y shares on April 28, 1995.
(4) The fund commenced selling Class Y shares on October 9, 1995.
The average annual total returns (with fees waived) of the fund's Class Z
shares were as follows for the periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Diversified Strategic Income
Fund(1)
%
%
%
High Income Fund(2)
Balanced Fund(3)
(1) The fund commenced selling Class Z shares on November 6, 1992.
(2) The fund commenced selling Class Z shares on November 6, 1992.
(3) The fund commenced selling Class Z shares on November 6, 1992.
A Class' total return figures calculated in accordance with the above
formula assume that the maximum sales charge or maximum applicable CDSC, as
the case may be, has been deducted for the hypothetical $1,000 initial
investment at the time of purchase.
It is important to note that the yield and total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the relevant fund's portfolio and operating
expenses and the expenses exclusively attributable to that Class.
Consequently, any given performance quotation should not be considered
representative of the Class' performance for any specified period in the
future. Because performance will vary, it may not provide a basis for
comparing an investment in the Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
company's portfolio securities.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the trust and its shareholders. This summary is not
intended as a substitute for individual tax advice and investors are urged
to consult their own tax advisors as to the tax consequences of an
investment in any fund of the trust.
Tax Status of the Funds
Each fund will be treated as a separate taxable entity for Federal income
tax purposes.
Each fund has qualified and the trust intends that each fund continue to
qualify separately each year as a "regulated investment company" under the
Code. A qualified fund will not be liable for Federal income taxes to the
extent its taxable net investment income and net realized capital gains are
distributed to its shareholders, provided that each fund distributes at
least 90% of its net investment income. One of the several requirements for
qualification is that a fund receive at least 90% of its gross income each
year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of equity or debt securities
or foreign currencies, or other income (including but not limited to gains
from options, futures, or forward contracts) derived with respect to the
fund's investment in such stock, securities, or currencies. The trust does
not expect any fund to have difficulty meeting this test.
Taxation of Investment by the Funds
Gains or losses on sales of securities by a fund generally will be long-
term capital gains or losses if the fund has held the securities for more
than one year. Gains or losses on sales of securities held for not more
than one year generally will be short-term. If a fund acquires a debt
security at a substantial discount, a portion of any gain upon sale or
redemption will be taxed as ordinary income, rather than capital gain, to
the extent that it reflects accrued market discount.
Options and Futures Transactions. The tax consequences of options
transactions entered into by a fund will vary depending on the nature of
the underlying security, whether the option is written or purchased, and
whether the "straddle" rules, discussed separately below, apply to the
transaction. When a fund writes a call or put option on an equity or
convertible debt security, it will receive a premium that will, subject to
the straddle rules, be treated as follows for tax purposes. If the option
expires unexercised, or if the fund enters into a closing purchase
transaction, the fund will realize a gain (or loss if the cost of the
closing purchase transaction exceeds the amount of the premium) without
regard to any unrealized gain or loss on the underlying security. Any such
gain or loss will be a short-term capital gain or loss, except that any
loss on a "qualified" covered call stock option that is not treated as a
part of a straddle may be treated as long-term capital loss. If a call
option written by a fund is exercised, the fund will recognize a capital
gain or loss from the sale of the underlying security, and will treat the
premium as additional sales proceeds. Whether the gain or loss will be
long-term or short-term will depend on the holding period of the underlying
security. If a put option written by a fund is exercised, the amount of the
premium will reduce the tax basis of the security that the fund then
purchases.
If a put or call option that a fund has purchased on an equity or
convertible debt security expires unexercised, the fund will realize
capital loss equal to the cost of the option. If the fund enters into a
closing sale transaction with respect to the option, it will realize a
capital gain or loss (depending on whether the proceeds from the closing
transaction are greater or less than the cost of the option). The gain or
loss will be short-term or long-term, depending on the fund's holding
period in the option. If the fund exercises such a put option, it will
realize a short-term capital gain or loss (long-term if the fund holds the
underlying security for more than one year before it purchases the put)
from the sale of the underlying security measured by the sales proceeds
decreased by the premium paid. If the fund exercises such a call option,
the premium paid for the option will be added to the tax basis of the
security purchased.
One or more funds may invest in section 1256 contracts, and the Code
imposes a special "mark-to-market" system for taxing these contracts. These
contracts generally include options on non-convertible debt securities
(including United States government securities), options on stock indexes,
futures contracts, options on futures contracts and certain foreign
currency contracts. Options on foreign currency, futures contracts on
foreign currency and options on foreign currency futures will qualify as
"section 1256" contracts if the options or futures are traded on or subject
to the rules of a qualified board or exchange. Generally, most of the
foreign currency options and foreign currency futures and related options
in which certain funds may invest will qualify as section 1256 contracts.
In general, gain or loss on section 1256 contracts will be taken into
account for tax purposes when actually realized (by a closing transaction,
by exercise, by taking delivery or by other termination). In addition, any
section 1256 contracts held at the end of a taxable year will be treated as
sold at their year-end fair market value (that is, marked to the market),
and the resulting gain or loss will be recognized for tax purposes.
Provided that section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and the unrealized year-end gain or
loss from these investment positions (including premiums on options that
expire unexercised) will be treated as 60% long-term and 40% short-term
capital gain or loss, regardless of the period of time particular positions
actually are held by a fund.
Straddles. While the mark-to-market system is limited to section 1256
contracts, the Code contains other rules applicable to transactions which
create positions which offset positions in section 1256 or other investment
contracts. Those rules, applicable to "straddle" transactions, are intended
to eliminate any special tax advantages for such transactions. "Straddles"
are defined to include "offsetting positions" in actively-traded personal
property. Under current law, it is not clear under what circumstances one
investment made by a fund, such as an option or futures contract, would be
treated as "offsetting" another investment also held by the fund, such as
the underlying security (or vice versa) and, therefore, whether the fund
would be treated as having entered into a straddle. In general, investment
positions may be "offsetting" if there is a substantial diminution in the
risk of loss from holding one position by reason of holding one or more
other positions (although certain "qualified" covered call stock options
written by a fund may be treated as not creating a straddle). Also, the
forward currency contracts entered into by a fund may result in the
creation of "straddles" for Federal income tax purposes.
If two (or more) positions constitute a straddle, a realized loss from one
position (including a mark-to-market loss) must be deferred to the extent
of unrecognized gain in an offsetting position. Also, the holding period
rules described above may be modified to re-characterize long-term gain as
short-term gain, or to re-characterize short-term loss as long-term loss,
in connection with certain straddle transactions. Furthermore, interest and
other carrying charges allocable to personal property that is part of a
straddle must be capitalized. In addition, "wash sale" rules apply to
straddle transactions to prevent the recognition of loss from the sale of a
position at a loss where a new offsetting position is or has been acquired
within a prescribed period. To the extent that the straddle rules apply to
positions established by a fund, losses realized by the fund may be either
deferred or re-characterized as long-term losses, and long-term gains
realized by the fund may be converted to short-term gains.
If a fund chooses to identify particular offsetting positions as being
components of a straddle, a realized loss will be recognized, but only upon
the liquidation of all of the components of the identified straddle.
Special rules apply to the treatment of "mixed" straddles (that is,
straddles consisting of a section 1256 contract and an offsetting position
that is not a section 1256 contract). If a fund makes certain elections,
the section 1256 contract components of such straddles will not be subject
to the "60%/40%" mark-to-market rules. If any such election is made, the
amount, the nature (as long-or short-term) and the timing of the
recognition of the fund's gains or losses from the affected straddle
positions will be determined under rules that will vary according to the
type of election made.
Constructive Sales. If a fund effects a short sale of securities at a time
when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") at the time it effects the short sale. However, such
constructive sale treatment may not apply if the fund closes out the short
sale with securities other than the appreciated securities held at the time
of the short sale and if certain other conditions are satisfied.
Uncertainty regarding the tax consequences of effecting short sales may
limit the extent to which a fund may effect short sales.
Section 988. Foreign currency gain or loss from transactions in (a) bank
forward contracts not traded in the interbank market and (b) futures
contracts traded on a foreign exchange may be treated as ordinary income or
loss under the Code section 988. A fund may elect to have section 988 apply
to section 1256 contracts. Pursuant to that election, foreign currency gain
or loss from these transactions would be treated entirely as ordinary
income or loss when realized. A fund will make the election necessary to
gain such treatment if the election is otherwise in the best interests of
the fund.
Taxation of the Trust's Shareholders
Dividends paid by a fund from investment income and distributions of short-
term capital gains will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gains will be taxable
to shareholders as long-term capital gain, whether paid in cash or
reinvested in additional shares, and regardless of the length of time that
the shareholder has held his or her shares of the fund. A portion of long-
term capital gains (including such gains attributable to the 60% long-term
gains portion of gains on Section 1256 contracts) may be designated as
eligible for the 20% maximum capital gains tax rate on gains.
Dividends of investment income (but not capital gains) from any fund
generally will qualify for the Federal dividends-received deduction for
domestic corporate shareholders to the extent that such dividends do not
exceed the aggregate amount of dividends received by the fund from domestic
corporations. If securities held by a fund are considered to be "debt-
financed" (generally, acquired with borrowed funds), are held by the fund
for less than 46 days (91 days in the case of certain preferred stock), or
are subject to certain forms of hedges or short sales, the portion of the
dividends paid by the fund which corresponds to the dividends paid with
respect to such securities will not be eligible for the corporate
dividends-received deduction.
If a shareholder (a) incurs a sales charge in acquiring or redeeming fund
shares and (b) disposes of those shares and acquires within 90 days after
the original acquisition, or (c) acquires within 90 days of the redemption,
shares in a mutual fund for which the otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., exchange privilege), the
original sales charge increases the shareholder's tax basis in the original
shares only to the extent the otherwise applicable sales charge for the
second acquisition is not reduced. The portion of the original sales charge
that does not increase the shareholder's tax basis in the original shares
would be treated as incurred with respect to the second acquisition and, as
a general rule, would increase the shareholder's tax basis in the newly
acquired shares. Furthermore, the same rule also applies to a disposition
of the newly acquired or redeemed shares made within 90 days of the second
acquisition. This provision prevents a shareholder from immediately
deducting the sales charge by shifting his or her investment in a family of
mutual funds.
Capital Gains Distribution. As a general rule, a shareholder who redeems or
exchanges his or her shares will recognize long-term capital gain or loss
if the shares have been held for more than one year, and will recognize
short-term capital gain or loss if the shares have been held for one year
or less. However, if a shareholder receives a distribution taxable as long-
term capital gain with respect to shares of a fund and redeems or exchanges
the shares before he or she has held them for more than six months, any
loss on such redemption or exchange that is less than or equal to the
amount of the distribution will be treated as a long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income,
or fails to certify that he or she has provided a correct taxpayer
identification number and that he or she is not subject to such
withholding, then the shareholder may be subject to a 31% "backup
withholding tax" with respect to (a) any taxable dividends and
distributions and (b) any proceeds of any redemption of trust shares. An
individual's taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and may be
credited against a shareholder's regular Federal income tax liability.
Municipal High Income Fund. Because the Municipal High Income Fund will
distribute exempt-interest dividends, interest on indebtedness incurred by
shareholders, directly or indirectly, to purchase or carry shares of the
fund will not be deductible for Federal income tax purposes. If a
shareholder redeems or exchanges shares of the fund with respect to which
he receives an exempt-interest dividend before holding the shares for more
than six months, no loss will be allowed on the redemption or exchange to
the extent of the dividend received. Also, that portion of any dividend
from the fund which represents income from private activity bonds other
than those issued for charitable, educational and certain other purposes
held by the fund may not retain its tax-exempt status in the hands of a
shareholder who is a "substantial user" of a facility financed by such
bonds or a person "related" to a substantial user. Investors should consult
their own tax advisors to see whether they may be substantial users or
related persons with respect to a facility financed by bonds in which the
fund may invest. Moreover, investors receiving social security or certain
other retirement benefits should be aware that tax-exempt interest received
from the fund may under certain circumstances cause up to one-half of such
retirement benefits to be subject to tax. If the fund receives taxable
investment income, it will designate as taxable the same percentage of each
dividend as the actual taxable income bears to the total investment income
earned during the period for which the dividend is paid. The percentage of
each dividend designated as taxable, if any, may, therefore, vary.
Dividends derived from interest from Municipal Securities which are exempt
from Federal tax also may be exempt from personal income taxes in the state
where the issuer is located, but in most cases will not be exempt under the
tax laws of other states or local authorities. Annual statements will set
forth the amount of interest from Municipal Securities earned by the fund
in each state or possession in which issuers of portfolio securities are
located.
ADDITIONAL INFORMATION
The trust was organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master trust agreement
dated March 12, 1985, as amended from time to time, and on November 5, 1992
the trust filed an Amended and Restated Master Trust Agreement (the "trust
agreement"). The trust commenced business as an investment company on
September 16, 1985, under the name Shearson Lehman Special Portfolios. On
February 21, 1986, December 6, 1988, August 27, 1990, November 5, 1992,
July 30, 1993 and October 14, 1994, the trust changed its name to Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney Shearson Income Funds and Smith Barney Income Funds, respectively.
PNC Bank is located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and serves as the custodian for each of the funds,
except Diversified Strategic Income Fund. Chase, located at Chase MetroTech
Center, Brooklyn, NY 11245, serves as the custodian for Diversified
Strategic Income Fund. Under their respective custodian agreements with the
respective funds, each custodian is authorized to establish separate
accounts for foreign securities owned by the appropriate fund to be held
with foreign branches of other U.S. banks as well as with certain foreign
banks and securities depositories. For its custody services to the trust,
each custodian receives monthly fees based upon the month-end aggregate net
asset value of the appropriate fund, plus certain charges for securities
transactions including out-of-pocket expenses, and costs of any foreign and
domestic sub-custodians. The assets of the trust are held under bank
custodianship in compliance with the 1940 Act.
First Data is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the trust's transfer agent. Under the transfer agency agreement,
First Data maintains the shareholder account records for the trust, handles
certain communications between shareholders and the trust and distributes
dividends and distributions payable by each fund. For these services First
Data receives from each fund a monthly fee computed on the basis of the
number of shareholder accounts maintained during the year for each fund and
is reimbursed for certain out-of-pocket expenses.
VOTING RIGHTS
In the interest of economy and convenience, certificates representing
shares in the trust are not physically issued except upon specific request
made by a shareholder to First Data. First Data maintains a record of each
shareholder's ownership of trust shares. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares
voting for the election of trustees can elect all of the trustees. Shares
are transferable but have no preemptive or subscription rights.
Shareholders generally vote by fund, except with respect to the election of
trustees and the selection of independent public accountants.
Massachusetts law provides that, under certain circumstances, shareholders
could be held personally liable for the obligations of the trust. However,
the trust agreement disclaims shareholder liability for acts or obligations
of the trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the trust
or a trustee. The trust agreement provides for indemnification from the
trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the trust would be unable to meet its
obligations, a possibility that the trust's management believes is remote.
Upon payment of any liability incurred by the trust, the shareholder paying
the liability will be entitled to reimbursement from the general assets of
the trust. The trustees intend to conduct the operations of the trust in
such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the trust.
The trustees themselves have the power to alter the number and the terms
of office of the trustees, and they may at any time lengthen their own
terms or make their terms of unlimited duration (subject to certain
removal procedures) and appoint their own successors, provided that in
accordance with the 1940 Act at any time at least a majority, but in most
instances at least two-thirds, of the trustees have been elected by the
shareholders of the fund. Shares do not have cumulative voting rights and
therefore the holders of more than 50% of the outstanding shares of the
fund may elect all of the trustees irrespective of the votes of other
shareholders. Class A, Class B, Class O, Class L and Class Y shares of a
fund, if any, represent interests in the assets of that fund and have
identical voting, dividend, liquidation and other rights on the same terms
and conditions, except that each Class of shares has exclusive voting
rights with respect to provisions of the fund's Rule 12b-1 distribution
plan which pertain to a particular class. For example, a change in
investment policy for a fund would be voted upon only by shareholders of
the fund involved. Additionally, approval of each fund's Investment
advisory agreement is a matter to be determined separately by that fund.
Approval of a proposal by the shareholders of one fund is effective as to
that fund whether or not enough votes are received from the shareholders
of the other funds to approve the proposal as to those funds. As of
______________, 1999, the following shareholders beneficially owned 5% or
more of a class of shares of a fund:
High Income Fund - Class Y
High Income Fund - Class Z
Municipal High Income Fund - Class L
Balanced Fund - Class L
Balanced Fund - Class Z
Convertible Fund - Class L
Convertible Fund - Class O
Convertible Fund - Class Y
Diversified Strategic Income Fund - Class Y
Diversified Strategic Income Fund - Class Z
FINANCIAL STATEMENTS
The funds' Annual Reports for the fiscal year ended July 31, 1999 is
incorporated herein by reference in its entirety. The annual report
was filed on [ ],1999, Accession Number [ ].
APPENDIX
Description of Ratings
Description of S&P Corporate Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B and CCC
Bonds rated BB and B are regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB represents a lower degree of
speculation than B and CCC, the highest degrees of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Description of Moody's Corporate Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A
Bonds which are rated A possess favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal
or interest.
Moody's applies the numerical modifier 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Description of S&P Municipal Bond Ratings
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality
of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong
due to the competitive position of the municipal enterprise or to the
nature of the revenues. Basic security provisions (including rate covenant,
earnings test for issuance of additional bonds, debt service reserve
requirements) are rigorous. There is evidence of superior management.
AA
High Grade -- The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds
rated AA have the second strongest capacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the
adverse affects of changes in circumstances and economic conditions than
bonds in higher rated categories. This rating describes the third strongest
capacity for payment of debt service. Regarding municipal bonds, the
ratings differ from the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer
to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest. Bonds
in this group are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of debt
service. The difference between A and BBB ratings is that the latter shows
more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB includes the lowest degree
of speculation and CC the highest degree of speculation. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
Description of S&P Municipal Note Ratings
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
Description of Moody's Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic ratings category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic ratings category.
Description of Moody's Municipal Note Ratings
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short- and long-term credit
risk. Loans bearing the designation MIG 1/VMIG 1 are the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2/VMIG 2 are of
high quality, with margins of protection ample, although not as large as
the preceding group. Loans bearing the designation MIG 3/VMIG 3 are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for refinancing,
in particular, is likely to be less well established. Loans bearing the
designation MIG 4/VMIG 4 are of adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
Description of Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-term
operating and financial strength combined with strong liquidity
characteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of A- or
higher) or the direct credit support of an issuer or guarantor that
possesses above average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity characteristics.
Paper rated A-1 must have the following characteristics: liquidity ratios
are adequate to meet cash requirements; long-term senior debt is rated A or
better; the issuer has access to at least two additional channels of
borrowing; basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances; typically, the issuer's industry is well
established and the issuer has a strong position within the industry; and
the reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (a) evaluation of the management of the issuer; (b) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and customer
acceptance; (d) liquidity; (e) amount and quality of long-term debt; (f)
trend of earnings over a period of ten years; (g) financial strength of
parent company and the relationships which exist with the issuer; and (h)
recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.
Short-term obligations, including commercial paper, rated A-1+ by IBCA
Limited or its affiliate IBCA Inc. are obligations supported by the highest
capacity for timely repayment. Obligations rated A-1 have a very strong
capacity for timely repayment. Obligations rated A-2 have a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic and financial conditions.
Thomson BankWatch employs the rating "TBW-1" as its highest category, which
indicates that the degree of safety regarding timely repayment of principal
and interest is very strong. "TBW-2" is its second highest rating category.
While the degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as high as for
issues rated "TBW-1."
Fitch 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 funds, in accordance with industry practice, recognize such
ratings within categories as gradations, viewing for example S&P's rating
of A-1+ and A-1 as being in S&P's highest rating category.
Smith Barney
INCOME FUNDS
Statement of
Additional Information
November 29, 1999
Convertible Fund
Diversified Strategic Income Fund
Exchange Reserve Fund
High Income Fund
Municipal High Income Fund
Total Return Bond Fund
Balanced Fund
Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013 SALOMON SMITH BARNEY
A Member of CitiGroup
FD 01217 11/99
PART C-Other InformationItem 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)(1) Registrant's form of stock certificates for Class A, Class B,
Class C and Class Y shares of beneficial interest of Smith Barney Convertible
Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney Exchange
Reserve Fund, Smith Barney High Income Fund, Smith Barney Premium Total Return
Fund, Smith Barney Municipal High Income Fund (formerly Smith Barney Tax-Exempt
Income Fund) and Smith Barney Balanced Fund (formerly Smith Barney Utilities
Fund) are incorporated by reference to Post-Effective Amendment No. 34 to the
Registration Statement.
(2) Registrant's form of stock certificates for Class A,
Class B, Class C and Class Y shares of beneficial
interest of Smith Barney Total Return Bond Fund to be filed by amendment.
(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 Balanced Fund (formerly Smith Barney
Utilities Fund), Smith Barney Convertible Fund, Smith Barney High Income Fund,
Smith Barney Municipal High Income Fund (formerly 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 to be filed by Amendment.
(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 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 incorporated by reference to Post-Effective
Amendment No. 54.
(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 incorporated by reference Post-Effective
(5) Amendment No. 54.
(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) Not applicable.
(j) Consent of Independent Auditors to be filed by amendment.
(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 Balanced Fund (formerly Smith Barney Utilities Fund), Smith Barney
Convertible Fund, Smith Barney High Income Fund, Smith Barney Premium Total
Return Fund, Smith Barney Municipal High Income Fund (formerly 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 - SSB Citi Fund Management LLC ("SSB Citi") formerly SSBC
Fund Management Inc.
SSB Citi was incorporated in December 1968 under the laws of the State of
Delaware. On September 21, 1999, SSB Citi was converted into a Delaware Limited
Liability Company. SSB Citi 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"). SSB Citi 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 trustees of SSB Citi together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and trustees during the
past two fiscal years, is incorporated by reference to Schedules A and D of
FORM ADV filed by SSB Citi 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) SSB Citi Fund Management LLC
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 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 29th day of
September, 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, 9/29/99
Heath B. McLendon President and Chief
Executive Officer
/s/Lewis E. Daidone Senior Vice President, 9/29/99
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Lee Abraham* Trustee 9/29/99
Lee Abraham
/s/ Allan J. Bloostein* Trustee 9/29/99
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee 9/29/99
Richard E. Hanson
/s/ Jane F.Dasher** Trustee 9/29/99
Jane F.Dasher
/s/ Donald R. Foley** Trustee 9/29/99
Donald R. Foley
/s/ Paul Hardin** Trustee 9/29/99
Paul Hardin
/s/ Roderick Rasmussen** Trustee 9/29/99
Roderick Rasmussen
/s/ John P. Toolan** Trustee 9/29/99
John P. Toolan
* Signed by Heath B. McLendon, their duly authorized
attorney-in-fact, pursuant to power of attorney dated September 4, 1996.
** Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney dated May 20, 1999.
/s/Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibits
(j) Consent of KPMG Peat Marwick to be filed by Amendment
(n) Financial Date Schedule to be filed by Amendment
cover
