SMITH BARNEY INCOME FUNDS (the "Funds")
on behalf of the
Smith Barney Balanced Fund
Smith Barney High Income Fund
Smith Barney Diversified Strategic Income Fund
Supplement dated June 2, 2000
to Prospectuses dated November 28, 1999
The information supplements certain information set forth in each
Prospectus of the Funds listed above under the section "More on
the fund's investments"
Investments in Corporate Loans The fund may invest up to 15% of
its total assets in corporate loans. The primary risk in an
investment in corporate loans is that borrowers may be unable to
meet their interest and/or principal payment obligations. The
fund may acquire an interest in corporate loans by purchasing
both participations in and assignments of portions of corporate
loans from third parties. Corporate loans in which the fund may
invest may be collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or subordinate
loans entail a greater risk of nonpayment than do investments in
corporate loans which hold a more senior position in the
borrower's capital structure or that are secured with collateral.
The fund's policy limiting its illiquid securities will be
applicable to corporate loans which are also subject to the risks
generally associated with investments in illiquid securities.
FD ____
g:\legal\funds\slip\2000\secdocs\600stk1
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
And June 2, 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 36
Purchase of Shares 46
Redemption of Shares 54
Exchange Privilege 57
Distributor.. 58
Valuation of Shares 62
Performance Data (See in the prospectuses "Performance" or "Yield
Information") 62
Taxes (See in the prospectuses "Dividends, Distributions and
Taxes") 67
Additional Information 71
Voting Rights 72
Financial Statements 78
Other Information 78
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.
Corporation Loans (Balanced Fund, High Income Fund and
Diversified Strategic Income Fund). These funds may invest up to
15% of its total assets in corporate loans. Corporate loans are
negotiated and underwritten by a bank or syndicate of banks and
other institutional investors. The funds may acquire an interest
in corporate loans through the primary market by acting as one of
a group of lenders of a corporate loan. The primary risk in an
investment in corporate loans is that the borrower may be unable
to meet their interest and/or principal payment obligations. The
occurrence of such default with regard to a corporate loan in
which the funds had invested would have an adverse affect on each
fund's net asset value. Corporate loans in that the funds may
invest may be collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or subordinate
loans entail a greater risk of nonpayment than do investments in
corporate loans which hold a more senior position in the
borrower's capital structure or that are secured with collateral.
The funds may also acquire an interest in corporate loans by
purchasing both participations ("Participations") in and
assignments ("Assignments") of portions of corporate loans from
third parties. By purchasing a Participation, the funds acquire
some or all of the interest of a bank or other leading
institution in a loan to a corporate borrower. The
Participations typically will result in the funds having a
contractual relationship only with the lender and not the
borrower. The funds will have the right to receive payments or
principal, interest and any fees to which it is entitled only
from the lender selling the Participation and only upon receipt
by the lender of the payments from the borrower. In connection
with purchasing Participations, the funds generally will have no
right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the funds may not directly benefit from
any collateral supporting the loan in which it has purchased the
Participation. As a result, the funds will assume the credit
risk of both the borrower and the lender that is selling the
Participation. The funds will acquire Participations only if the
lender interpositioned between the funds and the borrower is
determined by management to be creditworthy. When the funds
purchases Assignments from lenders, the funds will acquire direct
rights against the borrower on the loan. However, since
Assignments are arranged through private negotiations between
potential assignees and assignors, the rights and obligations
acquired by the funds as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigned
lender.
In addition, the funds may have difficulty disposing of its
investments in corporate loans. The liquidity of such securities
is limited and the funds anticipate that such securities could be
sold only to a limited number of institutional investors. The
lack of liquid secondary market could have an adverse impact on
the value of such securities and on each fund's ability to
dispose of particular Assignments or Participations when
necessary to meet each fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of liquid secondary
market for corporate loans also may make it more difficult for
the funds to assign a value to those securities for purposes of
valuing each fund's investments and calculating its net asset
value. Each fund's policy limiting its illiquid securities will
be applicable to investments in corporate loans.
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
--
--
$2,094,3
94
--
N/A
1998
$23,753
$34,725
$2,187,8
05
$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
Amended as of 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
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