<PAGE>
[SB]Smith Barney
[MF]Mutual Funds
P R O S P E C T U S
[GRAPHIC]
Diversified
Strategic
Income Fund
Class A and B Shares
- -----------------------------
November 28, 1999 as amended on
April 14, 2000
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 crime.
<PAGE>
Diversified Strategic Income Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 9
Management.................................................................. 10
Choosing a class of shares to buy........................................... 11
Comparing the fund's classes................................................ 12
Sales charges............................................................... 13
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.......................................... 21
Share price................................................................. 22
Financial highlights........................................................ 24
</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
Smith Barney Mutual Funds
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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.
These securities are commonly known as "junk bonds" because they are rated in
the lower rating categories of nationally recognized rating agencies or, if
unrated, of similar credit quality. 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:
Diversified Strategic Income Fund
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.Emphasizes those sectors and maturities that seem to be most undervalued or
appropriate based on the manager's economic and interest rate outlook
.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
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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
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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
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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. This bar chart shows
the performance of the fund's Class B shares for each full calendar year since
the fund's inception. Class A 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.
Total Return for Class B Shares
[BAR CHART APPEARS HERE]
90 91 92 93 94 95 96 97 98
---- ---- ---- ---- ---- ---- ---- ---- ----
7.80% 19.05% 6.11% 12.68% (3.50%) 15.07% 9.93% 7.06% 5.30%
Calendar years ended December 31
Quarterly returns:
Highest: 5.75% in 3rd quarter 1991; Lowest: -2.13% in 1st quarter 1994. Year to
date: -1.24% through 9/30/99
Diversified Strategic Income Fund
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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 ("Lehman Index"), an unmanaged broad-based
index consisting of government, corporate, mortgage-related and asset-backed
fixed income securities. 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 1.11% 6.09% n/a 7.23% 11/06/92
B 0.88% 6.45% n/a 8.65% 12/28/89
Lehman Index 8.69% 7.27% n/a 8.69%* n/a
</TABLE>
* Index comparison begins on 12/31/89.
Smith Barney Mutual Funds
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Fee 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
<S> <C> <C>
Maximum sales charge (load)
imposed on purchases
(as a % of offering price) 4.50% None
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None* 4.50%
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B
<S> <C> <C>
Management fee 0.65% 0.65%
Distribution and service (12b-1) fee 0.25% 0.75%
Other expenses 0.12% 0.09%
----- -----
Total annual fund operating expenses 1.02% 1.49%
</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) $549 $760 $988 $1,642
Class B (redemption at end of period) $602 $771 $913 $1,653
Class B (no redemption) $152 $471 $813 $1,653
</TABLE>
Diversified Strategic Income Fund
8
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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
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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, both
investment officers of the manager and managing directors of Salomon Smith Bar-
ney have served as investment officers of the fund since the fund's inception
in 1989. Mr. Hildreth has been an investment officer of the manager and manag-
ing director of the subadviser since 1994 and an investment officer of the fund
since 1998.
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. Through a selling agreement, PFS Investments Inc. sells
fund shares to the public.
Distribution plans The fund has adopted a Rule 12b-1 distribution plan for its
Class A and B shares. Under the plan, the fund pays distribution and/or service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
Diversified Strategic Income Fund
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Choosing a class of shares to buy
You can choose between two classes of shares: Classes A and B. 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 will be immediately invested.
This may help offset the higher expenses of Class B, but only if the fund
performs well.
Initial purchases of shares must be made through a PFS Investments Registered
Representative.
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 and B Both Classes
<S> <C> <C>
General $1,000 $50
IRAs, Self Employed Retirement Plans, Uniform
Gift to Minor Accounts $250 $50
Qualified Retirement Plans* $25 $25
Systematic Investment Plans $25 $25
</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
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Comparing the fund's classes
Your PFS Investments Registered 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
<S> <C> <C>
Key features .Initial .No initial
sales sales
charge charge
.You may .Deferred
qualify sales
for reduc- charge
tion or declines
waiver of over time
initial .Converts
sales to Class A
charge after 8
.Lower years
annual .Higher
expenses annual
than Class expenses
B than Class
A
- -------------------------------------------------------------
Initial sales charge Up to None
4.50%;
reduced or
waived for
large pur-
chases and
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
- -------------------------------------------------------------
Deferred sales charge 1.00% on Up to 4.50%
purchases charged
of $500,000 when you
or more if redeem
you redeem shares. The
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
- -------------------------------------------------------------
Annual distribution and service fees 0.25% of 0.75% of
average average
daily net daily net
assets assets
- -------------------------------------------------------------
Exchange privilege* Class A Class B
shares shares
of certain of certain
Smith Bar- Smith Bar-
ney funds ney funds
- -------------------------------------------------------------
</TABLE>
*Ask your PFS Investments Registered Representative for the Smith Barney funds
available for exchange.
Diversified Strategic Income Fund
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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
Smith Barney Mutual Funds
13
<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
.Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if your PFS Investments Registered Representative is notified
.Participants in the Primerica Corporation Savings and Retirement Plan
.Investors who purchase through a PFS Investments Registered Representative
with proceeds from a prior mutual fund redemption, if certain conditions are
met
If you want to learn about additional waivers of Class A initial sales charges,
contact your PFS Investments Registered 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>
Diversified Strategic Income Fund
14
<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
Each time you place a request to sell shares, the fund will first sell any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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.
PFS Distributors Inc., an affiliate of PFS Investments Inc., receives deferred
sales charges as partial compensation for its expenses in connection with the
sale of shares, including the payment of compensation to your PFS Registered
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 PFS Investments Registered Representative or consult the SAI.
Smith Barney Mutual Funds
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<PAGE>
Buying shares
Buying shares .Initial purchases of shares of each fund must be made
by mail through a PFS Investments Registered Representative by com-
pleting the appropriate application. The completed applica-
tion should be forwarded to the Fund's subtransfer agent,
PFS Shareholder Services.
.Subsequent investments may be sent by mail directly to PFS
Shareholder Services.
.The address and telephone number of PFS Shareholder Services
is: 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30099-0062; (800) 544-5445.
.You may also reach PFS Shareholder Services by calling (800)
544-7278 for Spanish speaking representatives or (800) 824-
1721 for the TDD Line for the hearing impaired.
.Checks drawn on foreign banks must be payable in U.S. dol-
lars and have the routing number of the U.S. bank encoded
on the check.
- --------------------------------------------------------------------------------
Buying shares Initial purchases of shares for $10,000 may be made by wire
by wire order from your bank account. Contact PFS Shareholder Serv-
ices for details. In addition, once an account is open, you
may make additional wire orders through your PFS Investments
Registered Representative.
- --------------------------------------------------------------------------------
Through a
systematic You may authorize PFS Shareholder Services to transfer funds
investment automatically from a regular bank account, or other financial
plan institution to buy shares of a fund.
.Amounts transferred should be at least $25 monthly
.If you do not have sufficient funds in your account on a
transfer date, PFS Shareholder Services may charge you a
fee
For more information, contact your PFS Investments Registered
Representative or consult the SAI.
Diversified Strategic Income Fund
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<PAGE>
Exchanging shares
Smith Barney
offers a You should contact your PFS Investments Registered Represen-
distinctive tative to exchange into other Smith Barney funds. Be sure to
family of read the prospectus of the Smith Barney fund you are exchang-
funds ing into. An exchange is a taxable 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
certain Smith Barney funds. Not all Smith Barney funds
offer all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your PFS Investments Registered Repre-
sentative.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, PFS Shareholder Services
must receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be 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 You may exchange shares by telephone up to a minimum of
$500,000 if you elect telephone transactions on your account
application.
To learn more about the exchange privileges and Smith Barney
mutual funds you may be eligible to exchange into, contact
your PFS Investments Registered Representative or consult the
SAI.
Smith Barney Mutual Funds
17
<PAGE>
Redeeming shares
Redemptions Generally, a properly completed Redemption Form with any
by mail required signature guarantee is all that is required for a
redemption. In some cases, however, other documents may be
necessary.
You may redeem some or all of your shares by sending a
Redemption Form or other written request in proper form to
PFS Shareholder Services, 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0062. You may also reach PFS Share-
holder Services by calling (800) 544-5445 or (800) 544-7278
for Spanish speaking representatives or (800) 824-1721 for
the TDD Line for the hearing impaired. The written request
for redemption must be in good order. This means that you
have provided the following information. Your request will
not be processed without this information.
.Name of the fund
.Account number
.Dollar amount or number of shares to redeem
.Signature of each owner exactly as account is registered
.Other documentation required by PFS Shareholder Services
To be in good order, your request must include a signature
guarantee if:
.The proceeds of the redemption exceed $50,000
.The proceeds are not paid to the record owner(s) at the rec-
ord address
.The shareholder(s) has had an address change in the past 45
days
.The shareholder(s) is a corporation, sole proprietor, part-
nership, trust or fiduciary
You can obtain a signature guarantee from most banks, deal-
ers, brokers, credit unions and federal savings and loans,
but not from a notary public.
In all cases, your redemption price is the net asset value
next determined after your request is received in good
Diversified Strategic Income Fund
18
<PAGE>
order. Redemption proceeds normally will be sent within three
days. 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. Any
request that your redemption proceeds be sent to a destina-
tion other than your bank account or address of record must
be in writing and must include signature guarantees.
- --------------------------------------------------------------------------------
Redemptions You may redeem shares by telephone if you elect the telephone
by telephone transaction option on your account application. This is
available only for redemptions of $50,000 or less, and the
proceeds must be mailed to your address of record. In addi-
tion, you must be able to provide proper identification
information. You may not redeem by telephone if your address
has changed within the past 45 days or if your shares are in
certificate form. Telephone redemption requests may be made
by calling PFS Shareholder Services at (800) 544-5445 between
8:00 a.m. and 8:00 p.m. eastern time on any day the New York
Stock Exchange is open. Requests received after the close of
regular trading on the New York Stock Exchange are priced at
the net asset value next computed. If telephone redemptions
are not available for any reason, you may use the Fund's reg-
ular redemption procedure described above.
- --------------------------------------------------------------------------------
Payment of Whether you redeem by mail or telephone, your redemption pro-
redemption ceeds can be sent by check to your address of record or by
proceeds wire transfer to a bank account designated on your applica-
tion. You will be charged for wire transfers and for trans-
fers made directly to your bank by the Automated
Clearinghouse (ACH).
- --------------------------------------------------------------------------------
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 plan accounts) 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.
Smith Barney Mutual Funds
19
<PAGE>
The following conditions apply:
.Your shares must not be represented by certificates
.All dividends and distributions must be reinvested
.You can establish a withdrawal plan for a retirement account
only if you are eligible to receive distributions from the
account.
For more information, contact your PFS Investments Registered
Representative or consult the SAI.
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
Signature guarantees To be in good order, your redemption request must include
a signature guarantee:
.if proceeds of the redemption exceed $50,000
.if proceeds are not paid to the record owner at the record address
.if shareholder has had an address change in the past 45 days
.if shareholder is a corporation, sole proprietor, partnership, trust or fidu-
ciary
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
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 is made to PFS Shareholder Services. If
you hold share certificates it will take longer to exchange or redeem shares.
Dividends, distributions and taxes
Dividends The fund generally pays dividends, if any, monthly and makes capital
gain distributions 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 PFS Invest-
ments Registered Representative 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 PFS Shareholder
Services 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.
Smith Barney Mutual Funds
21
<PAGE>
<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.
Share price
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
The fund generally values its fund securities based on market prices or quota-
tions. The fund's currency conversions are done when the London stock exchange
closes, which is 12 noon Eastern time. When reliable market prices or quota-
tions are not readily available, or when the value of a security has been mate-
rially affected by events occurring after a foreign exchange closes, the fund
may price those securities at fair value. Fair value is determined in accor-
dance with procedures approved by the fund's board. A fund that uses fair value
to price securities may value those securities higher or lower than another
fund using market quotations to price the same securities.
Diversified Strategic Income Fund
22
<PAGE>
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 PFS Shareholder Services 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.
PFS Shareholder Services 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
23
<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 beneficial interest outstanding throughout each year
ended July 31:
<TABLE>
<CAPTION>
1999(/1/) 1998(/1/) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76
- ------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment
income(/2/) 0.50 0.53 0.62 0.61 0.94
Net realized and
unrealized gain/(loss) (0.46) 0.05 0.24 0.03 (0.18)
- ------------------------------------------------------------------------------
Total income from
operations 0.04 0.58 0.86 0.64 0.76
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.49) (0.58) (0.67) (0.62) (0.48)
Net realized gain (0.01) (0.05) -- -- --
Capital (0.04) -- -- (0.05) (0.19)
- ------------------------------------------------------------------------------
Total distributions (0.54) (0.63) (0.67) (0.67) (0.67)
- ------------------------------------------------------------------------------
Net asset value, end of
year $ 7.46 $ 7.96 $ 8.01 $ 7.82 $ 7.85
- ------------------------------------------------------------------------------
Total return 0.41% 7.47% 11.36% 8.39% 10.35%
- ------------------------------------------------------------------------------
Net assets, end of year
(000)'s $464,652 $397,127 $267,272 $202,700 $177,366
- ------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses(/2/) 1.02% 1.01% 1.03% 1.04% 1.09%
Net investment income 6.38 6.51 7.75 7.85 8.15
- ------------------------------------------------------------------------------
Portfolio turnover rate 150% 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>
Diversified Strategic Income Fund
24
<PAGE>
For a Class B share of beneficial interest outstanding throughout each year
ended July 31:
<TABLE>
<CAPTION>
1999(/1/) 1998(/1/) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 7.98 $ 8.03 $ 7.83 $ 7.86 $ 7.76
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(/2/) 0.46 0.49 0.59 0.58 0.70
Net realized and unrealized
gain/(loss) (0.46) 0.05 0.23 0.01 0.02
- ------------------------------------------------------------------------------
Total income from operations 0.00 0.54 0.82 0.59 0.72
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.46) (0.54) (0.62) (0.57) (0.44)
Net realized gain (0.01) (0.05) -- -- --
Capital (0.03) -- -- (0.05) (0.18)
- ------------------------------------------------------------------------------
Total distributions (0.50) (0.59) (0.62) (0.62) (0.62)
- ------------------------------------------------------------------------------
Net asset value, end of year $ 7.48 $ 7.98 $ 8.03 $ 7.83 $ 7.86
- ------------------------------------------------------------------------------
Total return (0.06)% 6.93% 10.89% 7.80% 10.00%
- ------------------------------------------------------------------------------
Net assets, end of year (000)'s $1,849 $2,280 $2,440 $2,380 $2,367
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 1.49% 1.50% 1.51% 1.52% 1.56%
Net investment income 5.88 6.12 7.34 7.36 6.82
- ------------------------------------------------------------------------------
Portfolio turnover rate 150% 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/) 1.61%
- ----------------------------------------------------
</TABLE>
(/3/) Amount represents less than $0.01 per share.
Smith Barney Mutual Funds
25
<PAGE>
Securities offered through
PFS Investment Inc.
--------------------------------------
MEMBER NASD A member of citigroup[LOGO]
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.
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 PFS
Investments Registered Representative, by calling PFS Shareholder Services
at 1-800-544-5445,
or by writing to the Fund at 3100 Breckinridge Boulevard, Building 200, Duluth,
GA 30099-0062.
SB-1J
5.00
Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Commission's Public
Reference Room in Washington, D.C. In addition, information on the operation of
the Public Reference Room may be obtained by calling the Commission at 1-202-
942-8090. Reports and other information about the fund are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov. Copies
of this information may be obtained for a duplicating fee by electronic request
at the following E-mail address: [email protected], or by writing the Commis-
sion's Public Reference Section, Washington, D.C. 20549-0102.
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.
(Investment Company Act
file no. 811-04254)
PFS Investments Inc.
4/00
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information
November 28, 1999
As
Amended April 14, 2000
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"),
with the exception of the Diversified Strategic Income
Fund as amended April 14, 2000 each is dated November
28, 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 2
Investment Objectives and Policies. 7
Risk Factors 35
Purchase of Shares 46
Redemption of Shares 54
Exchange Privilege 57
Distributor.. 59
Valuation of Shares 63
Performance Data (See in the prospectuses
"Performance" or "Yield Information") 63
Taxes (See in the prospectuses "Dividends,
Distributions and Taxes") 68
Additional Information 72
Voting Rights 73
Financial Statements 80
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 SSBC 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
("SaBAM")
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 50). 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 77). 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 68). 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 73). 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 69). 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.
Daniel J. Berkery, CFA, Vice President and Investment
Officer (Age 32). A Director of SaBAM. His address is
7 World Trade Center, New York, New York 10048.
Ross S. Margolies Vice President and Investment
Officer (Age 40) A Managing Director of SaBAM;
Senior Portfolio Manager for all SaBAM U.S. equity,
convertibles and arbitrage portfolios; Portfolio
Manager of 25 other investment companies associated
with Citigroup. His address is 7 World Trade Center,
New York, New York 10048.
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 12, 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 calendar year
ended December 31, 1998, such travel and out-of-pocket
expenses totaled $16,595.
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
$37,383
$0
$47,750
11
Allan J.
Bloostein
33,633
0
90,500
18
Richard E.
Hanson, Jr.
35,783
0
47,950
11
Jane Dasher+
16,433
0
N/A
11
Donald R.
Foley**+
12,000
0
57,100
12
Paul Hardin+
10,600
0
71,400
14
Heath B.
McLendon*
0
0
0
64
Roderick
C.Rasmussen+
10,600
0
57,100
12
John P.
Toolan**+
10,600
0
54,700
12
* Designates a director who is an "interested person"
of the fund.
** Pursuant to the fund's deferred compensation plan,
the indicated directors have elected to defer the
following amounts of their compensation from the
fund: Donald R Foley: $4,200 and John P. Toolan:
$10,600, and the following amounts of their total
compensation from the Fund Complex: Donald R.
Foley: $21,000 and John P. Toolan: $54,700.
+ Elected by the fund's board of directors on May 14,
1999.
Note: Upon attainment of age 72 the fund's current
directors may elect to change to emeritus status.
Any directors elected or appointed to the Board of
Directors in the future will be required to change
to emeritus status upon attainment of age 80.
Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during
which time they are paid 50% of the annual retainer
fee and meeting fees otherwise applicable to the
fund's directors, together with reasonable out-of-
pocket expenses for each meeting attended. During
the fund's last fiscal year, aggregate compensation
from the fund to Emeritus Directors totaled $0.
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. SaBAM serves as sub-investment
adviser to Convertible Fund pursuant to a written
agreement dated November 22, 1999. The agreements
between each, Global Capital Management and SaBAM, and
SSB Citi were most recently approved by the fund's
board of trustees, including a majority of the
Independent Trustees, on June 16, 1999 and September
17, 1999, respectively.
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. SSB Citi renders investment advice
to investment companies that had aggregate assets
under management as of October 31, 1999 in excess of
$114 billion.
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%
* As compensation for sub-advisory services,
the SSB Citi pays SaBAM a fee in an amount
agreed to from time to time by the parties
but not to exceed the fee paid to SSB Citi
under its current advisory agreement.
** From SSB Citi's fee, Global Capital
Management receives 0.10%.
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
$727,464
Diversified Strategic
Income Fund
12,546,98
0
13,233,25
8
13,056,066
Exchange Reserve Fund
442,557
326,309
423,119
High Income Fund
5,646,405
7,363,535
8,208,808
Municipal High Income
Fund
3,395,338
3,103,442
2,832,068
Total Return Bond Fund
(1)
N/A
378,792
1,169,060
Balanced Fund
6,431,624
5,097,517
4,222,260
____________________________
(1) Total Return Bond Fund waived $155,458 and $124,974
in management fees for the fiscal year ended July
31, 1999 and the fiscal period ended July 31, 1998,
respectively. 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
$290,986
Diversified Strategic
Income Fund
5,576,436
5,881,448
5,802,695
Exchange Reserve Fund
295,038
217,539
282,079
High Income Fund
2,258,562
2,945,414
3,283,523
Municipal High Income
Fund
1,697,669
1,551,721
1,416,034
Total Return Bond Fund*
N/A
N/A
N/A
Balanced Fund
2,858,500
2,265,563
1,876,560
___________________________
*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 $2,908,014, respectively.
Prior to November 22, 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 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
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. 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.
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. 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. In addition, the fund may invest in
obligations rated as low as Caa by Moody's or CCC by
S&P or having an equivalent rating by any NRSRO.
Securities that are rated Caa or CCC are of poor
standing. These issues may be in default or present
elements of danger that may exist with respect to
principal or interest.
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.
The fund may invest up to 10% of its assets in
securities rated below investment grade and unrated
securities of comparable quality. 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. These securities
are considered speculative in that their issues 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.
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 (Balanced,
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"), American Depository Debentures,
American Depository Notes, American Depository Bonds,
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 net 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, except Convertible Fund, which is not
restricted, may invest up to 5% of its assets in the
securities of issuers which have been in continuous
operation for less than three years. 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 10% of the value of
the fund's net assets. Included within that amount,
but not to exceed 5% 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 ("junk 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, except Convertible 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, except Convertible
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 (for Convertible Fund,
would exceed 10% of the value of the fund's
net assets). At no time may more than 2% of
the fund's net assets (for Convertible Fund,
at no time may more than 5% 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. Invest in other open-end investment
companies( except as part of a merger,
consolidation, reorganization or acquisition
of assets). This restriction does not apply
to investments in closed-end publicly traded
investment companies.
17. With respect to Balanced Fund, purchasing in
excess of 5% of the voting securities of a
public utility or public utility holding
company, so as to become a public utility
holding company as defined in the Public
Utility Holding Company Act of 1935, as
amended.
The trust has adopted two additional investment
restrictions applicable to Exchange Reserve Fund, the
first of which is a fundamental policy, which prohibit
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%
27 %
Diversified Strategic
Income Fund
85
128
150
High Income Fund
78
102
96
Municipal High Income
Fund
51
84
50
Total Return Bond Fund
N/A
0
32
Balanced Fund
45
110
60
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
SaBAM, 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
- --
- --
$2,094,39
4
- --
N/A
1998
$23,753
$34,725
$2,187,80
5
$20,200
- --
1999
$13,850
$3,634
$592,637
$20,619
$0
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
- --
- --
$13,080*
- --
- --
*Includes $2,520 for execution, research and
statistical services.
% 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
- --
- --
2.21%
- --
- --
% 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
- --
- --
1.95%
- --
- --
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 Deferred
Sales Charge of 1.00% on redemptions made within 12
months of purchase. The Deferred Sales Charge on
Class A shares is payable to Smith Barney, which
compensates Salomon Smith Barney Financial
Consultants and other dealers whose clients make
purchases of $500,000 or more.
The Deferred Sales Charge is waived in the same
circumstances in which the Deferred Sales Charge
applicable to Class B and Class L shares is waived.
See "Deferred Sales Charge Alternatives" and "Waivers
of Deferred Sales Charge."
Members of the selling group may receive up to 90% of
the sales charge and may be deemed to be underwriters
of the fund as defined in the 1933 Act. The reduced
sales charges shown above apply to the aggregate of
purchases of Class A shares of the fund made at one
time by "any person," 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. (except Exchange Reserve Fund) 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; (j)
purchases by Section 403(b) or Section 401(a) or (k)
accounts associated with Copeland Retirement Programs;
and (k) accounts associated with "k" Choice and
Collective Choice. 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
Deferred Sales Charge
(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.
In determining the applicability of any Deferred Sales
Charge, it will be assumed that a redemption is made
first of shares representing capital appreciation,
next of shares representing the reinvestment of
dividends and capital gain distributions and finally
of other shares held by the shareholder for the
longest period of time. The length of time that
Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the
date 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.
PFS Accounts
Initial purchase of shares of the Exchange Reserve
Fund and the Diversified Strategic Income Fund must be
made through a PFS Investments Registered
Representative by completing the appropriate
application found in this prospectus. The completed
application should be forwarded to the sub-transfer
agent, 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30099-0062. Checks drawn on foreign banks must
be payable in U.S. dollars and have the routing number
of the U.S. bank encoded on the check. Subsequent
investments may be sent directly to the sub-transfer
agent. In processing applications and investments,
the transfer agent acts as agent for the investor and
for PFS Investments and also as agent for the
distributor, in accordance with the terms of the
prospectus. If the transfer agent ceases to act as
such, a successor company named by the fund will act
in the same capacity so long as the account remains
open.
Shares purchased will be held in the shareholder's
account by the sub-transfer agent. Share certificates
are issued only upon a shareholder's written request
to the sub-transfer agent. A shareholder that has
insufficient funds to complete any purchase will be
charged a fee of $27.50 per returned purchase by PFS.
Investors in Class B shares may open an account by
making an initial investment of at least $1,000 for
each account in Class B (except for Systematic
Investment Plan accounts), or $250 for an IRA or a
Self-Employed Retirement Plan in a Fund. Subsequent
investments of at least $50 may be made for each
Class. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code,
the minimum initial investment requirement for Class B
shares and the subsequent investment requirement for
each Class in the Fund is $25. For the fund's
Systematic Investment Plan, the minimum initial
investment requirement for Class B shares and the
subsequent investment requirement for each Class is
$25. 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. Purchase orders received by the transfer agent
or sub-transfer agent 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.
Upon completion of certain automated systems, initial
purchases of fund shares may be made by wire. The
minimum investment that can be made by wire is
$10,000. Before sending the wire, the PFS Investments
Registered Representative must contact the sub-
transfer agent at (800) 665-8677 to obtain proper wire
instructions. Once an account is open, a shareholder
may make additional investments by wire. The
shareholder should contact the sub-transfer agent at
(800) 544-5445 to obtain proper wire instructions.
Upon completion of certain automated systems,
shareholders who establish telephone transaction
authority on their account and supply bank account
information may make additions to their accounts at
any time. Shareholders should contact the sub-
transfer agent at (800) 544-5445 between 8:00 a.m. and
8:00 p.m. eastern time any day that the NYSE is open.
If a shareholder does not wish to allow telephone
subsequent investments by any person in his account,
he should decline the telephone transaction option on
the account application. The minimum telephone
subsequent investment is $250 and can be up to a
maximum of $10,000. By requesting a subsequent
purchase by telephone, you authorize the sub-transfer
agent to transfer funds from the bank account provided
for the amount of the purchase. A shareholder that
has insufficient funds to complete the transfer will
be charged a fee of up to $27.50 by PFS or the sub-
transfer agent. A shareholder who places a stop
payment on a transfer or the transfer is returned
because the account has been closed, will also be
charged a fee of up to $27.50 by PFS or the sub-
transfer agent. Subsequent investments by telephone
may not be available if the shareholder cannot reach
the sub-transfer agent whether because all telephone
lines are busy or for any other reason; in such case,
a shareholder would have to use the fund's regular
subsequent investment procedure described above.
Redemption proceeds can be sent by check to the
address of record or by wire transfer to a bank
account designated on the application. A shareholder
will be charged a $25 service fee for wire transfers
and a nominal service fee for transfers made directly
to the shareholder's bank by the Automated Clearing
House.
An Account Transcript is available at a shareholder's
request, which identifies every financial transaction
in an account since it has opened. To defray
administrative expenses involved with providing
multiple years worth of information, there is a $15
charge for each Account Transcript requested.
Additional copies of tax forms are available at the
shareholder's request. A $10 fee for each tax form
will be assessed.
The sub-transfer agent will process and mail a
shareholder's redemption check usually within two to
three business days after receiving the redemption
request in good order. The shareholder may request
the proceeds to be mailed by two-day air express for
an $8 fee that will be deducted from the shareholder's
account or by one-day air express for a $15 fee that
will be deducted from the shareholder's account.
Additional information regarding the sub-transfer
agent's services may be obtained by contacting the
Client Services Department at (800) 544-5445.
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 Deferred Sales
Charge. 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 Deferred Sales Charge 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 Deferred Sales Charge. Class B shares of
the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable Deferred
Sales Charge of the two funds and, for the purposes of
calculating Deferred Sales Charge 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 Deferred Sales Charge, the
proceeds are immediately invested at a price as
described above, in shares of the fund being acquired.
Salomon Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be
modified or terminated at any time after written
notice to shareholders.
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
Deferred Sales Charge than that imposed by the Funds,
the exchanged Class B shares will be subject to the
higher applicable Deferred Sales Charge. Upon an
exchange, the new Class B shares will be deemed to
have been purchased on the same date as the Class B
shares of the Fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L
shares will be deemed to have been purchased on the
same date as the Class L shares of the Fund that have
been exchanged.
Class 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 Financial Consultants or PFS Investments
Registered Representatives 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 Deferred Sales Charge 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.
$1,727,061
$901,748
$127,769
$40,702
$81,352
$1,188,28
0
Balanced
508,037
280,078
32,704
11,511
19,426
229,036
High
Income
1,573,010
440,969
94,828
18,200
82,073
787,001
Muni High
234,359
153,156
22,768
7,238
8,300
157,890
Convertibl
e
11,648
13,342
1,566
462
1
37,848
Ex.
Reserve
(259,138)
35,492
0
2,551
(8,226)
933
Total
Return
44,151
52,714
8,052
2,204
3,615
78,685
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 and Diversified Strategic Income Fund pay 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 year ended July 31, 1999, Salomon Smith
Barney received $37,248,100, in the aggregate from the
trust under the Plan.
The following expenses were incurred during the
periods indicated:
Initial Sales Charges
Class A
For the Fiscal Year Ended July 31:
Fund
1997*
1998*
1999**
Convertible Fund
$
19,000
$ 19,000
$16,000
Diversified Strategic
Income Fund
983,000
1,344,000
1,022,000
High Income Fund
726,000
1,571,000
1,302,000
Municipal High Income
Fund
46,000
70,000
101,000
Total Return Bond Fund
N/A
1,146,000
215,000
Balanced Fund
55,000
68,000
140,000
* Salomon Smith Barney received the total
amount.
** Salomon Smith Barney and CFBDS, each,
received a portion of the total amount.
Class L
For the Fiscal Year Ended July 31:
Fund
1997*
1998*
1999**
Convertible Fund
N/A
$2,000
$2,000
Diversified Strategic
Income Fund
N/A
78,000
977,000
High Income Fund
N/A
112,000
739,000
Municipal High Income
Fund
N/A
3,000
19,000
Total Return Bond Fund
N/A
21,000
110,000
Balanced Fund
N/A
4,000
59,000
* Salomon Smith Barney received the total
amount.
** Salomon Smith Barney and CFBDS, each,
received a portion of the total amount.
Deferred Sales Charge (paid to Salomon Smith Barney)
Class A
For the Fiscal Year Ended
July 31:
Fund
1998
1999
Convertible Fund
N/A
N/A
Diversified Strategic Income Fund
$23,000
$12,000
Exchange Reserve Fund
N/A
N/A
High Income Fund
12,000
32,000
Municipal High Income Fund
N/A
3,000
Total Return Bond Fund
1,000
19,000
Balanced Fund
N/A
1,000
Class B
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
59,000
$
50,000
$35,000
Diversified Strategic
Income Fund
2,858,00
0
2,494,000
2,298,00
0
Exchange Reserve Fund
618,000
349,000
491,000
High Income Fund
831,000
936,000
1,545,00
0
Municipal High Income Fund
535,000
231,000
127,000
Total Return Bond Fund
N/A
34,000
348,000
Balanced Fund
2,514,00
0
829,000
255,000
Class L
Fund
1998
1999
Convertible Fund
$0
$1,000
Diversified Strategic Income Fund
35,000
58,000
Exchange Reserve Fund
N/A
14,000
High Income Fund
20,000
60,000
Municipal High Income Fund
0
3,000
Total Return Bond Fund
20,000
17,000
Balanced Fund
0
0
Class O
For the Fiscal Year Ended
July 31:
Fund
1998
1999
Balanced Fund
$1,000
$0
Convertible Fund
0
0
Service Fees and Distribution Fees
For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
413,173
$
400,232
$295,113
Diversified Strategic
Income Fund
19,195,740
19,373,20
3
18,209,0
44
Exchange Reserve Fund
737,595
543,651
705,198
High Income Fund
5,818,152
7,255,916
8,242,83
7
Municipal High Income Fund
4,316,732
3,724,428
3,182,23
1
Total Return Bond Fund
N/A
329,050
1,034,86
5
Balanced Fund
9,205,137
7,016,893
5,578,81
2
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 3.97% and 3.98% for Class B and
Class C shares, respectively. The compound effective
yield was 4.05% and 4.06% for Class B and Class C
shares, respectively. As of July 31, 1999, the fund's
average portfolio maturity was 12 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
(7.96)%
7.14%
7.45%
Diversified Strategic
Income Fund
(4.17)
6.53
6.39
High Income Fund
(7.97)
7.31
8.25
Municipal High Income Fund
(2.04)
5.44
5.70
Total Return Bond Fund
(6.18)
N/A
(2.63)
Balanced Fund
6.65
12.19
9.93
*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.
Each portfolio may, from time to time, advertise its
average annual total return calculated as shown above but
without including the deduction of the maximum applicable
initial sales charge or deferred sales charge. The
average annual total return for each portfolio's Class A
shares for the periods shown ended July 31, 1999 without
including the deduction of the maximum applicable sales
charge is as follows:
Fund*
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund
(3.11)%
8.25%
8.28%
Diversified Strategic
Income Fund
0.41
7.53
7.12
High Income Fund
(3.65)
8.31
8.99
Municipal High Income Fund
2.06
6.30
6.35
Total Return Bond Fund
(1.79)
N/A
0.57
Balanced Fund
12.27
13.35
10.78
*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 Deferred Sales
Charges (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)
(8.12)%
7.57%
7.27%
7.74%
Diversified Strategic Income
Fund (2)(6)
(4.27
)
6.90
N/A
7.93
High Income Fund(3)(6)
(8.10
)
7.65
7.99
8.21
Municipal High Income
Fund(4)(6)
(2.77
)
5.61
6.31
7.67
Total Return Bond Fund(7)
(6.46
)
N/A
N/A
(2.54)
Balanced Fund(5)
7.59
12.69
10.19
10.86
(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 Deferred
Sales Charge imposed on redemptions was 5.00%.
(7) Fund commenced operations on February 27, 1998.
The average annual total return for each portfolio's
Class B shares for the periods shown end July 31, 1999
without including the deduction of the maximum applicable
deferred sales charge is as follows:
Fund
One-Year
Period
Five-Year
Period
Ten-Year
Period
Since
Inception
Convertible Fund (1)
(3.61
)%
7.72%
7.27%
7.74%
Diversified Strategic Income
Fund (2)(6)
(0.06
)
7.04
N/A
7.93
High Income Fund(3)(6)
(4.15
)
7.79
7.99
8.21
Municipal High Income
Fund(4)(6)
1.48
5.77
6.31
7.67
Total Return Bond Fund(7)
(2.29
)
N/A
N/A
0.09
Balanced Fund(5)
11.78
12.82
10.19
10.86
(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 Deferred
Sales Charge imposed on redemptions was 5.00%.
(7) Fund commenced operations on February 27, 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)
(5.93)%
N/A
(5.10)%
Diversified Strategic Income
Fund(5)
(1.85)
6.85%
6.02
High Income Fund(4)
(5.92)
N/A
8.07
Municipal High Income
Fund(2)
(0.53)
N/A
7.41
Total Return Bond Fund(1)
(4.16)
N/A
(0.59)
Balanced Fund(6)
9.46
N/A
6.91
(1) The fund commenced selling Class L shares
(previously designated as Class C shares) on
February 27,1998.
(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 return for each portfolio's
Class L shares of the periods shown ended July 31, 1999
without including the deduction of the maximum applicable
initial sales charge or deferred sales charge is as
follows:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(3)
(4.08)%
N/A
(4.26)%
Diversified Strategic Income
Fund(5)
(1.85)
6.85%
6.02
High Income Fund(4)
(4.08)
N/A
8.29
Municipal High Income
Fund(2)
1.42
N/A
7.64
Total Return Bond Fund(1)
(2.24)
N/A
0.14
Balanced Fund(6)
11.43
N/A
7.85
(1) The fund commenced selling Class L shares
(previously designated as Class C shares) on
February 27, 1998.
(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)
(4.56)%
N/A
8.66%
Balanced Fund(2)
10.95
12.85%
9.39
(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 return for each portfolio's
Class O Shares of the periods shown ended July 31, 1999
without including the deduction of the maximum applicable
initial sales charge or deferred sales charge is as
follows:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
(3.66)%
N/A
8.66%
Balanced Fund(2)
11.79
12.85%
9.39
(1) The fund commenced selling Class O shares
(previously designated as Class C shares) on
November 7, 1994.
(2) The fund commenced selling Class O shares
(previously designated as Class C shares) on
February 4, 1993.
The average annual total returns (with fees waived) of
the fund's Class Y shares were as follows for the
periods indicated:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
(2.68)%
N/A
6.94%
Diversified Strategic Income
Fund(2)
0.72
N/A
7.02
High Income Fund(3)
(3.33)
N/A
7.07
Balanced Fund(4)
N/A
N/A
N/A
(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. There were no Class Y shares
outstanding as of July 31, 1999.
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)
0.84%
7.93%
7.48%
High Income Fund(2)
(3.49)
8.59
9.26
(1) The fund commenced selling Class Z shares on
November 6, 1992.
(2) The fund commenced selling Class Z shares on
November 6, 1992.
Neither Class Y nor Class Z shares impose an initial
sales charge or deferred sales charge.
A Class' total return figures calculated in accordance
with the above formula assume that the maximum sales
charge or maximum applicable Deferred Sales Charge, 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.
If for any taxable year a fund does not qualify as
regulated investment companies, all of its taxable
income will be subject to federal income tax at
regular corporate rates (without any deduction for
distributions to its shareholders). In such event,
dividend distributions, including amounts derived from
long-term capital gains or shareholders to the extent
of current and accumulated earnings and profits, and
would be eligible for the dividends received deduction
for corporations in the case of corporate
shareholders.
On July 31, 1999, the unused capital loss carryovers,
by fund, were approximately as follows: Convertible
Fund, $2,263,000 and Total Return Bond Fund,
$1,372,200. For Federal income tax purposes, these
amounts are available to be applied against future
capital gains of the fund that has the carryovers, if
any, that are realized prior to the expiration of the
applicable carryover. The carryovers expire as
follows:
FUND
July 31,
(in thousands)
2000
2001
2002
2003
2004
2005
2006
2007
Convertible
- --
- --
- --
- --
- --
- --
- --
$2,263,00
0
Total Return
Bond
- --
- --
- --
- --
- --
- --
- --
$1,372,20
0
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.
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 fund shares and (b) disposes of those shares
and acquires within 90 days after the original
acquisition, 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 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 November 12, 1999, the following shareholders
beneficially owned 5% or more of a class of shares of
a fund:
High Income Fund - Class Y
Smith Barney Concert Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 7,921,364.875 (30.88%) shares
Smith Barney Concert Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 6,829,078.027 (26.62%) shares
Byrd & Co.
First Union National Bank
Taxable Account
Attn: Diane Pilegg
Mutual Funds DVD Proc. #PA4905
530 Walnut Street
Philadelphia, PA 19106-3620
Owned 2,806,513.891 (10.94%) shares
Smith Barney Concert Series, Inc.
Select Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,949,457.848 (7.60%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,423,555.230 (5.55%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,331,331.065 (5.19%) shares
Convertible Fund - Class L
Joe Trautwein
Bonnie Trautwein
Rt 1 Box 494
Fort Gay, WV 25514
owned 7,973.665 (24.52%) shares
Alfred L Curry
SSB IRA Rollover Custodian
6832 Trapper Way
Midland, GA 31820-3813
owned 3,864.712 (11.85%) shares
Harold Egon Gottschalk Jr.
And Barbara Gottschalk
Community Property
11603 Osage Trail
Lakeside, CA 92040
owned 3,640.226 (11.16%) shares
Raymond Trudeau
Smith Barney Inc. IRA Custodian
99 Plummer Hill Road
Belmont, NH 03220-5811
owned 3,102.730(9.51%) shares
Harold A. Savage
Smith Barney Inc. IRA Custodian
2108 Ludwick Drive
Maryville, TN 37803
owned 1,843.869 (5.65%) shares
Wilmer L. Keiser
Betty L. Keiser TTEES
The Keiser Family Trust
UAD 4/1/97
13060 Metcalf, Apt. 303
Overland Park, KS 66213
owned 1,688.782(5.18%) shares
Convertible Fund - Class O
John J. Madden and Deborah A. Madden JTWROS
4107 Golden Grove Road
Greenwood, IN 46143
owned 3,685.609 (10.43%) shares
Kathryn Jeanne La Reau
Smith Barney Inc. Spousal Cust.
U/A/A 2/13/79
1813 S. Pebble Beach Rd.
Sun City Center, FL 33573
owned 2,607.575 (8.62%) shares
Joseph H. Siemer
Smith Barney Inc. IRA Custodian
8752 Carousel Park Circle B105
Cincinnati, OH 45251
owned 2,456 (8.12%) shares
Edgar L. Makowski
SSB IRA Rollover Custodian
1900 East Girard Pl.
Unit 408
Englewood, CO 80110
owned 1,988.595 (6.57%) shares
John R. Payzant & Carolyn R. Payzant Trustees
FBO John R. Payzant & Carolyn R. Payzant
U/A/D 7/19/88
P.O.Box 277
Hampton, NH 03843
owned 1,844.700 (6.10%) shares
Keith M. Lehrer
SSB IRA Custodian
20801 Nordhoff Street
Chatsworth, CA 91311
owned 1,812.343 (5.99%) shares
Michigan Floral Assoc.
Attn: Rodney Crittenden
5815 Executive Drive
Suite B P.O. Box 24065
Lansing, MI 48909
owned 1,808.556 (5.98%) shares
Hobart A Marvin TTEE
Marvin Family Trust
UAD 10/20/92
2557 Upper Applegate Rd
Jacksonville, OR 97530
owned 1,634.551 (5.40%) shares
Thompson Marital Trust
Diane VanDusen & Rolfe G.
Thompson, Trustees
U/A/D 6/23/93
6 Casa Lona Way
Lakeland, FL 33813
owned 1,564.317 (5.17%) shares
Convertible Fund - Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,513,757.694 (54.84%) shares*
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,251,672.215 (19.53%) shares*
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 965,214.376 (15.06%) shares*
Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 364,359.627 (5.69%) shares*
_________________________________________
* The Fund believes that these entities are not
the beneficial owners of shares held of record
by them
Diversified Strategic Income Fund Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 10,469,232.183(47.37%) shares*
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,939,321.447 (17.82%) shares*
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,729,895.856 (16.88%) shares*
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,824,726.583 (8.26%) shares*
Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,459,444.197 (6.60%) shares*
_________________________________________
* The Fund believes that these entities are not
the beneficial owners of shares held of record
by them
Diversified Strategic Income Fund Class Z
Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 3,820,061.554 (99.99%) shares*
_________________________________________
* The Fund believes that these entities are not
the beneficial owners of shares held of record
by them
FINANCIAL STATEMENTS
The funds' Annual Reports for the fiscal year ended
July 31, 1999 are incorporated herein by reference in
their entirety. The annual reports were filed on
October 26,1999, Accession Number 91155-99-664.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney Mutual Funds
average 21 years in the industry and 15 years with the
firm.
Smith Barney Mutual Funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Salomon
Smith Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range
of equity and fixed income strategies that seek
to capture opportunities across asset classes
and investment styles using disciplined
investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a
Concert Portfolio that may help their investment
needs. As needs change, investors can easily
choose another long-term, diversified investment
from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific
municipal funds.
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 28, 1999
As Amended April 14, 2000
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
