AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY
27, 1997
REGISTRATION NO.2-71469 811-3158
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 29 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 32 X
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
(Exact name of Registrant as Specified in Charter)
AREA CODE AND TELEPHONE NUMBER (212)723-9218
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 720-9218
Christina T. Sydor
Secretary
Smith Barney Fundamental Value Fund Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
on January 27, 1997 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its
shares pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended.
Registrant's Rule 24f-2 Notice for the fiscal year ended September 30, 1996
was
filed on
or about November 26, 1996 as Accession Number 0000091155-96-000484.
The registrant, Smith Barney Fundamental Value Fund Inc., a Maryland
corporation, is
the successor to Smith Barney Fundamental Value Fund Inc., a Washington
corporation,
pursuant to Rule 414 of the Securities Act of 1933 (the "Act"), has, effective
with post-
effective amendment number 25 to this registration statement, adopted this
registration
statement for all purposes under the Act and the Securities Exchange Act of
1934.
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents
Front Cover
Contents Page
Cross-Reference Sheet
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Financial Highlights Financial
Highlights
4. General Description of Registrant Cover Page; Prospectus Summary;
Investment Objective and
Management
Policies;
Additional Information
5. Management of the Fund Management of the Fund;
Distributor; Additional
Information;
Annual Report
5A. Management's Discussion of Annual Report
Fund Performance
6. Capital Stock and Other Investment Objective and
Securities Policies; Dividends,
Distributions and
Taxes; Additional
Information
7. Purchase of Securities Being Valuation of Shares; Purchase of
Offered Shares; Exchange
Privilege;
Redemption of Shares;
Minimum
Account Size;
Distributor; Additional
Information
8 Redemption or Repurchase Purchase of Shares; Redemption of
Shares; Exchange
Privilege
9. Pending Legal Proceedings Not Applicable
Part B Statement of
Item No. Additional Information
Caption
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and Distributor; Additional
Information
History
13. Investment Objectives and Investment Objectives
and Management Policies
14. Management of the Fund Management of the Fund;
Distributor
15. Control Persons and Principal Management of the Fund
Holders of Securities
16. Investment Advisory and Other Management of the Fund; Distributor
Services
17. Brokerage Allocation and Investment Objective and
Other Services Management Policies;
Distributor
18. Capital Stock and Other Investment Objective and
Securities Management Policies;
Purchase of
Shares; Redemption of
Shares; Taxes
19. Purchase, Redemption and Purchase of Shares; Redemption
Pricing of Securities Being Offered of Shares; Valuation of Shares;
Distributor; Exchange
Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Performance Data
Data
23. Financial Statements Financial Statements
P R O S P E C T U S
SMITH BARNEY
FUNDAMENTAL
VALUE
FUND INC.
JANUARY 27, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Everyday
<PAGE>
PROSPECTUS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Fundamental Value Fund Inc. (the "Fund") is a mutual fund with a
primary investment objective of long-term capital growth. Current income is a
secondary objective. The Fund seeks to achieve its primary objective by invest-
ing in a diversified portfolio of common stocks and common stock equivalents
and, to a lesser extent, in bonds and other debt instruments. The Fund's
investment emphasis is on securities which, in the judgment of the Fund's
investment adviser, are undervalued in the marketplace and, accordingly, have
above-average potential for capital growth.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated January 27, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing a Smith Barney Financial Consultant. The Statement of Additional Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
- -------------------------------------------------
VALUATION OF SHARES 20
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
- -------------------------------------------------
PURCHASE OF SHARES 21
- -------------------------------------------------
EXCHANGE PRIVILEGE 31
- -------------------------------------------------
REDEMPTION OF SHARES 33
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 36
- -------------------------------------------------
PERFORMANCE 36
- -------------------------------------------------
MANAGEMENT OF THE FUND 37
- -------------------------------------------------
DISTRIBUTOR 38
- -------------------------------------------------
ADDITIONAL INFORMATION 39
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company with a primary investment objective of long-term capital growth.
Current income is a secondary objective. The Fund seeks to achieve its princi-
pal objective by investing in a diversified portfolio of common stocks and
common stock equivalents and, to a lesser extent, in bonds and other debt
instruments. The Fund's investment emphasis is on securities which, in the
judgment of the Fund's investment adviser, are undervalued in the marketplace
and, accordingly, have above-average potential for capital growth. See "In-
vestment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
are offered to investors meeting an initial investment minimum of $5,000,000.
See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no sales charge, but will be subject to a contingent deferred sales
charge ("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain
redemptions. Class B shares are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.75% of the average daily net assets of the
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
original purchase. Upon conversion, these shares will no longer be subject to
an annual distribution fee. In addition, a certain portion of Class B shares
that have been acquired through the reinvestment of dividends and distribu-
tions ("Class B Dividend Shares") will be converted at that time. See "Pur-
chase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares, which when com-
bined with current holdings of Class C shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
investment alternative, Class B and Class C shares are sold without any ini-
tial sales charge so the entire purchase price is immediately invested in the
Fund. Any investment return on these additional invested amounts may partially
or wholly offset the higher annual expenses of these Classes. Because the
Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share pur-
chases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, may be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares held in funds sponsored by Smith Barney listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers eli-
gible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(K) AND EXECCHOICETM PROGRAMS Investors may be eligible to par-
ticipate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoiceTM Program. Class A and Class C shares are available without a sales
charge as investment alternatives under both of these programs. See "Purchase
of Shares--Smith Barney 401(k) and ExecChoiceTM Programs."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. Direct purchases by certain retirement plans may be made
through the Fund's transfer agent, First Data Investor Services Group, Inc.
(the "Transfer Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. There is no minimum investment requirement in Class A for
unitholders who invest distributions from a unit investment trust ("UIT") spon-
sored by Smith Barney. The minimum investment requirements for purchases of
Fund shares through the Systematic Investment Plan are described below. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment require-
ment for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM"), a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), serves as
the Fund's investment adviser and administrator. Holdings is a wholly owned
subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial serv-
ices holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services, Consumer Finance Services, Life Insur-
ance Services and Property & Casualty Insurance Services. See "Management of
the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid annual-
ly. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Certain of the investments held
by the Fund and certain of the investment strategies that the Fund may employ
might expose it to certain risks. The investments presenting the Fund with
risks are securities of less well-established companies or companies whose
capitalizations are less than the capitalizations of larger, better-known
companies and foreign securities. In addition, the Fund may assume additional
risk by entering into repurchase agreements, lending portfolio securities and
entering into transactions involving options. See "Investment Objective and
Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC
(as a percentage of original cost or
redemption proceeds, whichever is
lower) None* 5.00% 1.00% None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25 1.00 1.00 None
Other expenses 0.22 0.22 0.21 0.22
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.22% 1.97% 1.96% 0.97%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call a Smith Barney Financial Consultant.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
or ExecChoiceTM Programs. See "Purchase of Shares" and "Redemption of Shares."
Smith Barney receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also receives, with
respect to Class B and Class C shares, an annual 12b-1 fee of 1.00% of the
value of average daily net assets of the respective Class, consisting of a
0.75% distribution fee and a 0.25% service fee. "Other expenses" in the above
table include fees for shareholder services, custodial fees, legal and account-
ing fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A.................................. $62 $87 $114 $190
Class B.................................. 70 92 116 210
Class C.................................. 30 62 106 229
Class Y.................................. 10 31 54 119
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. 62 87 114 190
Class B.................................. 20 62 106 210
Class C.................................. 20 62 106 229
Class Y.................................. 10 31 54 119
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
8
<PAGE>
[This page intentionally left blank]
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by Deloitte & Touche LLP, indepen-
dent auditors, whose report thereon appears in the Fund's Annual Reports. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report dated
September 30, 1996, which is incorporated by reference into the Statement of
Additional Information.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
CLASS A SHARES 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $8.66 $8.20 $8.42 $7.22 $6.47
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.20 0.17 0.09 0.07 0.11
Net realized and unrealized
gains 1.01 1.23 0.30 1.65 0.78
- -------------------------------------------------------------------------------
Total Income From Operations 1.21 1.40 0.39 1.72 0.89
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.19) (0.13) (0.08) (0.06) (0.14)
Net realized gains (0.37) (0.39) (0.53) (0.46) --
Overdistribution of Net
Realized Gains -- (0.42) -- -- --
- -------------------------------------------------------------------------------
Total Distributions (0.56) (0.94) (0.61) (0.52) (0.14)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.31 $8.66 $8.20 $8.42 $7.22
- -------------------------------------------------------------------------------
TOTAL RETURN 14.73% 19.94% 4.92% 25.23% 14.01%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $458,208 $386,297 $264,765 $123,118 $77,842
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.22% 1.34% 1.30% 1.45% 1.28%
Net investment income 2.32 2.19 1.90 1.00 1.57
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 57% 45% 108% 111% 142%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY
TRANSACTIONS(1) $0.05 $0.05 -- -- --
- -------------------------------------------------------------------------------
</TABLE>
(1) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5.34 $7.15 $6.23 $8.36 $7.24
- -----------------------------------------------------------------------------------------------
0.15 0.16 0.17 0.15 0.18
1.50 (1.22) 1.18 (0.99) 2.00
- -----------------------------------------------------------------------------------------------
1.65 (1.06) 1.35 (0.84) 2.18
- -----------------------------------------------------------------------------------------------
(0.23) (0.18) (0.10) (0.26) (0.32)
(0.29) (0.57) (0.33) (1.03) (0.74)
- -----------------------------------------------------------------------------------------------
(0.52) (0.75) (0.43) (1.29) (1.06)
- -----------------------------------------------------------------------------------------------
$6.47 $5.34 $7.15 $6.23 $8.36
- -----------------------------------------------------------------------------------------------
33.47% (16.25)% 23.26% (6.92)% 34.39%
- -----------------------------------------------------------------------------------------------
$59,358 $63,159 $89,048 $84,670 $111,693
- -----------------------------------------------------------------------------------------------
1.30% 1.20% 1.10% 1.20% 1.00%
2.24 2.40 2.50 2.10 2.10
- -----------------------------------------------------------------------------------------------
116% 94% 62% 120% 66%
- -----------------------------------------------------------------------------------------------
-- -- -- -- --
- -----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
-----------------------------------
CLASS B SHARES 1996 1995 1994 1993(1)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.62 $8.16 $8.37 $7.31
- -----------------------------------------------------------------------------
INCOME FROM OPERATIONS:
NET INVESTMENT INCOME 0.13 0.12 0.09 0.05
NET REALIZED AND UNREALIZED GAINS 1.01 1.23 0.25 1.52
- -----------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.14 1.35 0.34 1.57
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (0.13) (0.08) (0.02) (0.05)
NET REALIZED GAINS (0.37) (0.39) (0.53) (0.46)
OVERDISTRIBUTION OF NET REALIZED
GAINS -- (0.42) -- --
- -----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.89) (0.55) (0.51)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.26 $8.62 $8.16 $8.37
- -----------------------------------------------------------------------------
TOTAL RETURN 13.82% 19.19% 4.21% 22.82%++
- -----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $703,552 $538,759 $361,254 $114,146
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES 1.97% 2.09% 2.06% 2.26%+
NET INVESTMENT INCOME 1.56 1.44 1.13 0.19+
- -----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 57% 45% 108% 111%
- -----------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(2) $0.05 $0.05 -- --
- -----------------------------------------------------------------------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to September 30,
1993.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------
CLASS C SHARES 1996 1995 1994 1993(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $8.62 $8.16 $8.37 $8.15
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
NET INVESTMENT INCOME 0.14 0.12 0.05 0.00
NET REALIZED AND UNREALIZED
GAINS 1.00 1.24 0.29 0.22
- -------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 1.14 1.36 0.34 0.22
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (0.13) (0.09) (0.02) --
NET REALIZED GAINS (0.37) (0.39) (0.53) --
OVERDISTRIBUTION OF NET REAL-
IZED GAINS -- (0.42) -- --
- -------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.90) (0.55) --
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.26 $8.62 $8.16 $8.37
- -------------------------------------------------------------------------------
TOTAL RETURN 13.82% 19.33% 4.24% 2.70%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $44,539 $21,812 $1,652 $308
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES 1.96% 2.09% 2.23% 2.25%+
NET INVESTMENT INCOME 1.52 1.44 0.96 0.20+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 57% 45% 108% 111%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY
TRANSACTIONS(2) $0.05 $0.05 -- --
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 10, 1993 (inception date) to September 30,
1993.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS Y SHARES 1996(1)
- --------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.78
- --------------------------------------------
INCOME FROM OPERATIONS:
NET INVESTMENT INCOME 0.23
NET REALIZED AND UNREALIZED GAINS 0.31
- --------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.54
- --------------------------------------------
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME --
- --------------------------------------------
TOTAL DISTRIBUTIONS --
- --------------------------------------------
NET ASSET VALUE, END OF YEAR $9.32
- --------------------------------------------
TOTAL RETURN++ 6.15%
- --------------------------------------------
NET ASSETS, END OF YEAR (000S) $44,641
- --------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
EXPENSES 0.75%
NET INVESTMENT INCOME 2.58
- --------------------------------------------
PORTFOLIO TURNOVER RATE 57%
- --------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(2) $0.05
- --------------------------------------------
</TABLE>
(1) For the period from January 27, 1996 (inception date) to September 30,
1996.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's primary objective is long-term capital growth. Current income is
only a secondary consideration. The Fund's primary objective is fundamental and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding shares. There is no guarantee that the Fund will achieve its
investment objective.
The Fund seeks to achieve its primary investment objective by investing in a
diversified portfolio of common stocks and common stock equivalents, including
preferred stocks and other securities convertible into common stocks. The Fund
also invests to a lesser extent in bonds and other debt instruments.
In pursuing the Fund's investment objective, SBMFM emphasizes securities
which, in its judgment, are undervalued in the marketplace and, accordingly,
have above-average capital growth potential. In general, the Fund invests in
securities of companies which are temporarily unpopular among investors but
which SBMFM regards as possessing favorable prospects for earnings growth
and/or improvements in the value of their assets and, consequently, as having a
reasonable likelihood of experiencing a recovery in market price.
When SBMFM believes that a defensive investment posture is warranted or when
opportunities for capital growth do not appear attractive, the Fund may tempo-
rarily invest all or a portion of its assets in short-term money market instru-
ments, including repurchase agreements with respect to those instruments. The
Fund is authorized to borrow money in an amount up to 10% of its total assets
for temporary or emergency purposes.
Further information about the Fund's investment policies, including a list of
those restrictions on its investment activities that cannot be changed without
the approval of the Fund's shareholders, appears in the Statement of Additional
Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund includes certain risks and special considerations,
such as those described below:
Short-Term Investments. As noted above, in certain circumstances the Fund may
invest in short-term money market instruments, such as obligations of the U.S.
government, its agencies and instrumentalities ("U.S. government securities"),
high-quality commercial paper and bank certificates of deposit and time depos-
its, and may engage in repurchase agreement transactions with respect to such
instruments.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain member banks of the Federal Reserve System and 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 securities for a rel-
atively
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the securities at an agreed-upon
price and time, thereby determining the yield during the Fund's holding peri-
od. This arrangement results in a fixed rate of return that is not subject to
market fluctuations during the Fund's holding period. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. SBMFM, acting under the supervision of the Board of Directors,
reviews on an ongoing basis the value of the collateral and the creditworthi-
ness of those dealers and banks with which the Fund enters into repurchase
agreements to evaluate potential risks.
Lending of Portfolio Securities. From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial organizations.
These loans will not exceed 20% of the Fund's total assets, taken at value.
Loans of portfolio securities by the Fund will be collateralized by cash, let-
ters of credit or U.S. government securities which are maintained at all times
in an amount equal to at least 100% of the current market value of the loaned
securities. The risks in lending portfolio securities, like those associated
with other extensions of secured credit, consist of possible delays in receiv-
ing 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 SBMFM to be of good standing and will not be
made unless, in the judgment of SBMFM, the consideration to be earned from
such loans would justify the risk.
Options on Securities. The Fund may write covered call options with respect
to its portfolio securities. The Fund realizes a fee (referred to as a "premi-
um") for granting the rights evidenced by a call option. A call option embod-
ies the right of its purchaser to compel the writer of the option to sell to
the option holder an underlying security at a specified price at any time dur-
ing the option period. Thus, the purchaser of a call option written by the
Fund has the right to purchase from the Fund the underlying security owned by
the Fund at the agreed-upon price for a specified time period.
Upon the exercise of a call option written by the Fund, the Fund may suffer
a loss equal to the excess of the security's market value at the time of the
option exercise over the Fund's cost of the security, less the premium
received for writing the option.
The Fund will write only covered options with respect to its portfolio secu-
rities. Accordingly, whenever the Fund writes a call option on its securities,
it will continue to own or have the present right to acquire the underlying
security for as long
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
as it remains obligated as the writer of the option. To support its obligation
to purchase the underlying security if a call option is exercised, the Fund
will either (a) deposit with its custodian in a segregated account, cash, U.S.
government securities, equity securities and debt securities of any grade so
long as such assets are liquid, unencumbered and marked to market daily, and
having a value at least equal to the exercise price of the underlying securi-
ties or (b) continue to own an equivalent number of puts of the same "series"
(that is, puts on the same underlying security) with exercise prices greater
than those that it has written (or, if the exercise prices of the puts that it
holds are less than the exercise prices of those that it has written, it will
deposit the difference with its custodian in a segregated account).
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or to unfreeze an under-
lying 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 clos-
ing purchase transaction, the Fund would purchase, prior to the holder's exer-
cise 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 a
result of the transaction. There can be no assurances 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, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.
The Fund may also, for hedging purposes, purchase put options on securities
traded on national securities exchanges as well as in the over-the-counter
market. The Fund may purchase put options on particular securities in order to
protect against a decline in the market value in the underlying securities
below the exercise price less the premium paid for the option. The ability to
purchase put options allows the Fund to protect the unrealized gain on an
appreciated security in its portfolio without actually selling the security.
Prior to expiration, most options may be sold in a closing sale transaction.
Profit or loss from such a sale will depend on whether the amount received is
more or less than the premium paid for the option plus the related transaction
cost.
The Fund may purchase options in the over-the-counter market ("OTC options")
to the same extent that it may engage in transactions in exchange traded
options. OTC options differ from exchange traded options in that they are
negotiated individually and terms of the contract are not standardized as in
the case of exchange traded options. Moreover, because there is no clearing
corporation involved in an OTC option, there is a risk of non-performance by
the counterparty to the option. However, OTC options generally are much more
available for securi-
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ties in a wider range of expiration dates and exercise prices than exchange
traded options. It is the current position of the staff of the SEC that OTC
options (and securities underlying the OTC options) are illiquid securities.
Accordingly, the Fund will treat OTC options as subject to the Fund's limita-
tion on illiquid securities until such time as there is a change in the SEC's
position.
Options on Broad-Based Domestic Stock Indexes. The Fund may, for hedging pur-
poses only, write call options and purchase put options on broad-based domestic
stock indexes and enter into closing transitions with respect to such options.
Options on stock indexes are similar to options on securities except that,
rather than having the right to take or make delivery of stock at the specified
exercised price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is "in the money." This amount
of cash is equal to the difference between the closing level of the index and
the exercise price of the option, expressed in dollars times a specified multi-
ple. The writer of the option is obligated, in return for the premium received,
to make delivery of this amount. Unlike stock options, all settlements are in
cash, and gain or loss depends on price movements in the stock market generally
rather than price movements in the individual stocks.
The effectiveness of purchasing puts and writing calls on stock index options
depends to a large extent on the ability of SBMFM to predict the price movement
of the stock index selected. Therefore, whether the Fund realizes a gain or
loss from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally. Additionally, because
exercises of index options are settled in cash, a call writer such as the Fund
cannot determine the amount of the settlement obligations in advance and it
cannot provide in advance for, or cover, its potential settlement obligations
by acquiring and holding the underlying securities. When the Fund has written
the call, there is also a risk that the market may decline between the time the
Fund has a call exercised against it, at a price which is fixed as of the clos-
ing level of the index on the date of exercise, and the time the Fund is able
to exercise the closing transaction with respect to the long call position it
holds.
Futures Contracts and Options on Futures Contracts. A futures contract pro-
vides for the future sale by one party and the purchase by the other party of a
certain amount of a specified security at a specified price, date, time and
place. The Fund may enter into futures contracts to sell securities when SBMFM
believes that the value of the Fund's securities will decrease. An option on a
futures contract, as contrasted with the direct investment in a futures con-
tract, gives the purchaser the right, in return for the premium paid, to assume
a position in a futures contract at a specified exercise price at any time
prior to the expiration date of the option. A call option gives the purchaser
of the option the right to enter into a futures contract to
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
buy and obliges the writer to enter into a futures contract to sell the under-
lying securities. A put option gives the purchaser the right to sell and
obliges the writer to buy the underlying contract. The Fund may enter into
futures contracts to purchase securities when SBMFM anticipates purchasing the
underlying securities and believes that prices will rise before the purchases
will be made. When the Fund enters into a futures contract to purchase an
underlying security, an amount of cash, U.S. government securities, equity
securities and debt securities of any grade so long as such assets are liquid,
unencumbered and marked to market daily, equal to the market value of the con-
tract, will be deposited in a segregated account with the Fund's custodian to
collateralize the position, thereby insuring that the use of the contract is
unleveraged. The Fund will not enter into futures contracts for speculation and
will only enter into futures contracts that are traded on a U.S. exchange or
board of trade.
The Fund may purchase options on futures contracts to hedge its portfolio
against the risk of a decline in the market value of securities held, and may
purchase call options on futures contracts to hedge against an increase in the
price of securities it is committed to purchase. The Fund may write put and
call options on futures contracts in entering into closing sale transactions
and to increase its ability to hedge against changes in the market value of the
securities it holds or is committed to purchase. The Fund will write put and
call options only on futures contracts that are traded on a domestic exchange
or board of trade.
In entering into transactions involving futures contracts and options on
futures contracts, the Fund will comply with applicable requirements of the
Commodities Futures Trading Commission (the "CFTC") which require that its
transactions in futures and options be engaged in for "bona fide hedging" pur-
poses or other permitted purposes, provided that aggregate initial margin
deposits and premiums required to establish positions, other than those consid-
ered by the CFTC to be "bona fide hedging," will not exceed 5% of the Fund's
net asset value, after taking into account unrealized profits and unrealized
losses on any such contracts.
Portfolio Transactions. Portfolio securities transactions or options on
behalf of the Fund are placed by SBMFM with a number of brokers and dealers,
including Smith Barney. Smith Barney has advised the Fund that, in transactions
with the Fund, Smith Barney charges a commission rate at least as favorable as
the rate Smith Barney charges its comparable unaffiliated customers in similar
transactions.
Foreign Securities and American Depositary Receipts. The Fund can invest up
to 25% of its assets in foreign securities and American Depositary Receipts
("ADRs"). ADRs are dollar-denominated receipts issued generally by domestic
banks representing the deposit with the bank of a security of a foreign issuer.
ADRs are publicly traded on exchanges or over the counter in the United States.
19
<PAGE>
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors. Short-
term investments that mature in 60 days or less are valued at amortized cost
whenever the Directors determine that amortized cost is fair value. Amortized
cost involves valuing an investment at its cost initially and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the investment. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all its net investment
income (that is, its net income other than its net realized capital gains) and
net realized capital gains, if any, once a year, normally at the end of the
year in which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4.00% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed ordi-
nary income or capital gains and expects to pay any other dividends and distri-
butions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally as
a result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class C and Class Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a reg-
ulated investment company under the Code. Dividends paid from net investment
20
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
income and distributions of net realized short-term capital gains are taxable
to shareholders as ordinary income, regardless of how long shareholders have
held their Fund shares and whether such dividends and distributions are
received in cash or reinvested in additional Fund shares. Distributions of net
realized long-term capital gains will be taxable to shareholders as long-term
capital gains, regardless of how long shareholders have held Fund shares and
whether such distributions are received in cash or are reinvested in addi-
tional Fund shares. Furthermore, as a general rule, a shareholder's gain or
loss on a sale or redemption of Fund shares will be a long-term capital gain
or loss if the shareholder has held the shares for more than one year and will
be a short-term capital gain or loss if the shareholder has held the shares
for one year or less. Some of the Fund's dividends declared from net invest-
ment income may qualify for the Federal dividends-received deduction for cor-
porations.
Statements as to the tax status of each shareholder's dividends and distri-
butions are mailed annually. Each shareholder also will receive, if appropri-
ate, various written notices after the close of the Fund's prior taxable year
as to the Federal income tax status of his or her dividends and distributions
which were received from the Fund during the Fund's prior taxable year. Share-
holders should consult their tax advisors about the status of the Fund's divi-
dends and distributions for state and local tax liabilities.
PURCHASE OF SHARES
GENERAL
The Fund currently offers a number of Classes of shares. Class A shares are
sold to investors with an initial sales charge and Class B and Class C shares
are sold without an initial sales charge but are subject to a CDSC payable
upon certain redemptions. Class Y shares are sold without an initial sales
charge or CDSC and will be available only to investors investing a minimum of
$5,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Series Inc., for which there is no minimum purchase amount). See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group, except for investors purchasing shares of the Fund through a quali-
fied retirement plan who may do so directly through the Transfer Agent. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class Y shares. No maintenance fee will be
charged by the Fund in connection with a brokerage account through which an
investor purchases or holds shares.
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment in the Fund of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan. Investors in Class Y shares
may open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C 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 C shares and the minimum subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
minimum subsequent investment minimum for all Classes is $50. There are no min-
imum investment requirements for Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, unitholders who invest distributions
from a UIT sponsored by Smith Barney, and Directors of the Fund 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 offering of shares
from time to time. Shares purchased will be held in the shareholder's account
by the Transfer Agent. Share certificates are issued only upon a shareholder's
written request to the Transfer Agent.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing 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 Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased through Smith Barney or Introducing
Brokers purchasing through Smith Barney, payment for Fund shares is due on the
third business day (the "settlement date") 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, Smith Barney or the Transfer Agent is authorized
through pre-authorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to
the shareholder's Fund account. A shareholder who has insufficient funds to
complete the transfer will be
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
charged a fee of up to $25 by Smith Barney or the Transfer Agent. The System-
atic Investment Plan also authorizes Smith Barney to apply cash held in the
shareholder's Smith Barney brokerage account or redeem the shareholder's shares
of a Smith Barney money market fund to make additions to the account. Addi-
tional information is available from the Fund or a Smith Barney Financial Con-
sultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES
CHARGE AS SALES DEALERS
% OF CHARGE AS REALLOWANCE
OFFERING % OF AS % OF
AMOUNT OF INVESTMENT PRICE AMOUNT INVESTED OFFERING PRICE
- -----------------------------------------------------------------
<S> <C> <C> <C>
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 * * *
- -----------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares offered with a sales charge held in funds sponsored by
Smith Barney listed under "Exchange Privilege."
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) by (i) Board Members of any of the
Smith Barney Mutual Funds, and employees of Travelers and its subsidiaries and
to the immediate families of such persons (including the surviving spouse of a
deceased Board Member or employee, and retired Board Members or employees),
pension, profit-sharing or other benefit plan for such persons and (ii) employ-
ees of members of the National Association of Securities Dealers, Inc., pro-
vided such
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employment
with 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) 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
equal to or greater than the maximum sales charge of the Fund) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) investments of dis-
tributions from a UIT sponsored by Smith Barney; (g) direct rollovers by plan
participants of distributions from a 401(k) plan offered to employees of Trav-
elers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k)
Program (Note: subsequent investments will be subject to applicable sales
charges); (h) purchases by separate accounts used to fund certain unregistered
variable annuity contracts; (i) purchases by investors participating in a
Smith Barney fee-based arrangement; and (j) purchases by Section 403(b) or
Section 401(a) or (k) accounts associated with Copeland Retirement Programs.
In order to obtain such discounts, the investor must provide sufficient infor-
mation 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 aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
same employer purchasing as a group, provided each participant makes the mini-
mum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A
shares at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount, and (c) satisfies uniform cri-
teria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
able to arrange for group meetings between representatives of the Fund and the
members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the discre-
tion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided 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 pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the goal is not achieved within the period, the investor must pay the differ-
ence between the sales charges applicable to the purchases made and the charges
previously paid, or an appropriate number of escrowed shares will be redeemed.
Please contact a Smith Barney Financial Consultant or the Transfer Agent to
obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment for Class Y shares. Such investors must make an
initial minimum purchase of $1,000,000 in Class Y shares of the Fund and agree
to purchase a total of $5,000,000 of Class Y shares of the same Fund within six
months from the date of the Letter. If a total investment of $5,000,000 is not
made within the six-month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (includ-
ing a service fee of 0.25%) and expenses applicable to the Fund's Class A
shares, which may include a CDSC of 1.00%. Please contact a Smith Barney Finan-
cial Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC 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. CDSC Shares that are redeemed will not be subject to a CDSC 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 C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC 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
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
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
held under the Smith Barney 401(k) Program, as described below. See "Purchase
of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
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 also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. Shareholders who held Class B shares of
Smith Barney Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on July 15, 1994 and who subsequently exchanged those shares for
Class B shares of the Fund will be offered the opportunity to exchange all
such Class B shares for Class A shares of the Fund four years after the date
on which those shares were deemed to have been purchased. Holders of such
Class B shares will be notified of the pending exchange in writing approxi-
mately 30 days before the fourth anniversary of the purchase date and, unless
the exchange has been rejected in writing, the exchange will occur on or about
the fourth anniversary date. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC 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 CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200)
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 CDSC
The CDSC 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) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (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 share-
holder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer Agent
in the case of all other shareholders) of the shareholder's status or holdings,
as the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. 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 CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more Smith Barney Mutual Funds.
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C 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 C shares for Class A shares of the
Fund. (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C 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 C 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) Program, whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity to exchange all of
its Class C 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 C shares of the Fund but instead may acquire Class A shares of the Fund.
Any Class C shares not converted will continue to be subject to the distribu-
tion fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any Par-
ticipating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to
a CDSC of 3.00% of redemption proceeds if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing approximately 60 days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the eighth anniversary date. Once the exchange has occurred, a Par-
ticipating Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If the Participat-
ing Plan elects not to exchange all of its Class B shares at that time, each
Class B share held by the Participating Plan will have the same conversion fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases to the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions on Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
30
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
Smith Barney Mutual Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of Class A, Class B and Class C
shares are subject to minimum investment requirements, and all shares are sub-
ject to the other requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Port-
folio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Funds
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc.--Balanced Portfolio
Smith Barney Concert Series Inc.--Conservative Portfolio
Smith Barney Concert Series Inc.--Growth Portfolio
Smith Barney Concert Series Inc.--High Growth Portfolio
Smith Barney Concert Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
***Smith Barney Municipal Money Market Fund, Inc.
***Smith Barney Muni Funds--California Money Market Portfolio
***Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) or ExecChoice(TM) Programs may exchange those shares for
Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her shares in any of
the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class in any of the funds identified above may do so without imposition of
any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund will provide notice in writing or
by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed 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 reg-
istration 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 Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
any applicable CDSC. Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Transfer Agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third day following receipt of proper tender,
except on any day on which the NYSE is closed or as permitted under the Invest-
ment Company Act of 1940, as amended (the "1940 Act") in extraordinary circum-
stances. Generally, if the redemption proceeds are remitted to a Smith Barney
brokerage account, these funds will not be invested for the shareholder's bene-
fit 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Fundamental Value Fund Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
mount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the Transfer Agent together with the redemption
request.
Any signature appearing on a share certificate, stock power or on a written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic 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 invest-
or's address of record. The Transfer Agent may require additional supporting
documents for
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
redemptions made by corporations, executors, administrators, trustees or guard-
ians. A redemption request will not be deemed properly received until the
Transfer Agent receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR SHAREHOLDERS WHO DO NOT HAVE A
SMITH BARNEY BROKERAGE ACCOUNT
Certain shareholders 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 the Transfer Agent at (800) 451-2010. Once
eligibility is confirmed, the shareholder must complete and return a
Telephone/Wire Authorization form, including a signature guarantee, that will
be provided by the Transfer Agent upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account application with a signature
guarantee when making his/her initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any Class or Classes of
the Fund's shares may be made by eligible shareholders by calling the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemptions of shares
(i) by retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire
Authorization Form and, for the protection of the shareholder's assets, will be
required to provide a signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the fund being acquired is identical to the registra-
tion of the shares of the fund exchanged. Such exchange requests may be made by
calling the Transfer Agent at (800) 451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves
the right to suspend, modify or discontinue the telephone redemption and
exchange program or to impose a charge for this service at any time following
at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retire-
ment plan accounts are eligible for automatic cash withdrawal plans only where
the shareholder is eligible to receive qualified distributions and has an
account value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect prior
to November 7, 1994, any applicable CDSC will be waived on amounts withdrawn
that do not exceed 2.00% per month of the value of a shareholder's shares sub-
ject to the CDSC.) For further information regarding the automatic cash with-
drawal plan, shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary redemption.
PERFORMANCE
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are not intended to indicate future performance. Total return
is computed for a specified period of time assuming deduction of the maximum
sales charge, if any, from the initial amount invested and reinvestment of all
income dividends and capital
36
<PAGE>
PERFORMANCE (CONTINUED)
gain distributions on the reinvestment dates at prices calculated as stated in
this Prospectus, then dividing the value of the investment at the end of the
period so calculated by the initial amount invested and subtracting 100%. The
standard average annual total return, as prescribed by the SEC, is derived
from this total return, which provides the ending redeemable value. Such stan-
dard total return information may also be accompanied with nonstandard total
return information for differing periods computed in the same manner but with-
out annualizing the total return or taking sales charges into account. The
Fund calculates current dividend return for each Class by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The current dividend return
for each Class may vary from time to time depending on market conditions, the
composition of its investment portfolio and operating expenses. These factors
and possible differences in the methods used in calculating current dividend
return should be considered when comparing a Class' current return to yields
published for other investment companies and other investment vehicles. The
Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from
Lipper Analytical Services, Inc. and other financial publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant agree-
ments between the Fund and the companies that furnish services to the Fund,
including agreements with the Fund's distributor, investment adviser, adminis-
trator, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment adviser and administrator. The State-
ment of Additional Information contains general background information regard-
ing each Director and executive officer of the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser and administrator. SBMFM (through its predeces-
sor entities) has been in the investment counseling business since 1940 and
renders investment management and administration services to a wide variety of
individual, institutional and investment company clients having aggregate
assets under management as of December 31, 1996 in excess of $80 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
37
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. Under
an investment advisory agreement, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
PORTFOLIO MANAGEMENT
John G. Goode, Chairman and Chief Investment Officer of Davis Skaggs Invest-
ment Management, a division of SBMFM, has served as Vice President and Invest-
ment Officer of the Fund since November 1990 and manages the day-to-day opera-
tions of the Fund, including making all investment decisions.
Mr. Goode's management discussion and analysis of the Fund's performance dur-
ing the fiscal year ended September 30, 1996 is included in the Fund's Annual
Report to Shareholders dated September 30, 1996. The Fund's Annual Report may
be obtained upon request and without charge from a Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number listed
on page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the annual rate of 0.75% of the average daily net assets attributable
to those Classes. Class B shares that automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to a
distribution fee. The fees are used by Smith Barney to pay its Financial Con-
sultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of print-
ing and mailing prospectuses to potential investors; payments to and expenses
of Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carry-
ing charges; and indirect and overhead costs of Smith Barney associated with
the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
38
<PAGE>
DISTRIBUTOR (CONTINUED)
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder service expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the appropriate-
ness of the Plan and its payment terms on a continuing basis and in so doing
will consider all relevant factors, including expenses borne by Smith Barney,
amounts received under the Plan and the proceeds of the CDSC.
ADDITIONAL INFORMATION
The Fund was originally incorporated under the laws of the State of Washing-
ton on March 17, 1981, and is registered with the SEC as a diversified, open-
end management investment company. On January 27, 1995, shareholders approved
the reincorporation of the Fund as a Maryland corporation which subsequently
occurred on May 24, 1995.
The Fund currently offers shares of common stock classified into four Clas-
ses, A, B, C and Y. Each Class of shares represents an identical pro rata
interest in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the desig-
nation of each Class; (b) the effect of the respective sales charges, if any,
for each Class; (c) the distribution and/or service fees borne by each Class;
(d) the expenses allocable exclusively to each Class; (e) voting rights on mat-
ters exclusively affecting a single Class; (f) the exchange privilege of each
Class; and (g) the conversion feature of the Class B shares. The Board of
Directors does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different share Classes of the Fund. The Directors,
on an ongoing basis, will consider whether any such conflict exists and, if so,
take appropriate action.
The Fund is not required to hold annual meetings, however the Directors will
call a meeting for any purpose upon written request of shareholders holding at
least 10% of the Fund's outstanding shares and the Fund will assist sharehold-
ers in calling such a meeting as required by the 1940 Act. When matters are
submitted for shareholder vote, shareholders of each Class will have one vote
for each full share owned and proportionate, fractional votes for fractional
shares held.
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania, serves as custodian of the Fund's investments.
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
First Data, located at Exchange Place, Boston, Massachusetts, serves as the
Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of investment securities held by the Fund at the
end of the reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. In addition, the Fund also plans to consolidate the mail-
ing of its Prospectus so that a shareholder having multiple accounts (that is,
individual, IRA and/or Self-Employed Retirement Plan accounts) will receive a
single Prospectus annually. When the Fund's annual report is combined with the
Prospectus into a single document, the Fund will mail the combined document to
each shareholder to comply with legal requirements. Any shareholder who does
not want this consolidation to apply to his or her account should contact his
or her Smith Barney Financial Consultant or the Transfer Agent.
40
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group[ART]
SMITH BARNEY
FUNDAMENTAL
VALUE
FUND INC.
388 Greenwich Street
New York, New York 10013
FD0206 1/97
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
SMITH BARNEY
FUNDAMENTAL VALUE FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 27, 1997
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus of Smith
Barney Fundamental Value Fund Inc. (the "Fund"), dated January 27, 1997,
as amended or supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The Fund's Prospectus may be
obtained from any Smith Barney Financial Consultant or by writing or
calling the Fund at the address or phone number listed above. This
Statement of Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both
the Prospectus and this Statement of Additional Information, except
where shown below.
Management of the Fund
2
Investment Objective and Management Policies
5
Purchase of Shares
1
8
Redemption of Shares
1
9
Distributor
2
0
Valuation of Shares
2
1
Exchange Privilege
2
2
Performance Data (See in the Prospectus
"Performance")
2
2
Taxes (See in the Prospectus "Dividends,
Distributions and Taxes")
2
5
Additional Information
2
8
Financial Statements
2
8
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are
as follows:
Name
Service
Smith Barney Inc. ("Smith Barney")
Distributor
Smith Barney Mutual Funds
Management Inc.
("SBMFM")
Investment Adviser
and Administrator
PNC Bank, National Association
("PNC")
Custodian
First Data Investor Services Group,
Inc. ("First Data")
Transfer Agent
These organizations and the functions they perform for the Fund
are discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Fund
The Directors and executive officers of the Fund, together with
information as to their principal business occupations during the past
five years, are set forth below. Each Director who is an "interested
person" of the Fund, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), is indicated by an asterisk.
Lloyd J. Andrews, age 76, Director. Private investor; Director of
North Coast Life Insurance Company and Flow Systems, Inc.; Past Vice
Chairman and Director of Chem-Nuclear Systems, Inc. His address is East
10110 Greenbluff Road, Mead, Washington 99021.
Robert M. Frayn, Jr., age 62, Director. President and Director of
Book Publishing Company. His address is 201 Westlake Avenue North,
Seattle, Washington 98109.
Leon P. Gardner, age 68, Director. Private investor; Chairman of
Fargo's Pizza Company. His address is 2310 N.E. Blue Ridge Drive,
Seattle, Washington 98177.
Howard J. Johnson, age 58, Director. President and Chairman of
Howard Johnson & Co., an actuary and pension consultant; Secretary and
Director of Wurts Johnson and Company; Director of Spring Street
Securities, Inc.; Director of Rainier Trust Company; Director ex-officio
of American Society of Pension Actuaries. His address is Suite 3707, 375
Park Avenue, New York, New York 10152.
David E. Maryatt, age 60, Director. Director of ALS Co., a textile
rental services firm; Private Investor. His address is 1326 Fifth
Avenue, Seattle, Washington 98101.
*Heath B. McLendon, age 63, Chairman of the Board and Investment
Officer. Managing Director of Smith Barney and Chairman of the Board of
Smith Barney Strategy Advisers Inc.; prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers"); Vice Chairman of Shearson Asset Management. Mr.
McLendon is Chairman of the Board of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Frederick O. Paulsell, age 57, Director. Principal of Olympic
Capital Partners. His address is 1325 Fourth Avenue Suite 1900, Seattle,
Washington 98101.
Jerry A. Viscione, age 52, Director. Dean of Albers School of
Business and Economics, Seattle University. His address is 3480
Northeast 155 Street, Seattle, Washington 98155.
Julie W. Weston, age 53, Director. Attorney; prior to 1987,
Secretary and General Counsel of Skinner Corporation, a distributor of
consumer and industrial products. Her address is 416 34th Avenue,
Seattle, Washington 98122.
Jessica M. Bibliowicz, age 37, President. Executive Vice President
of Smith Barney; prior to January 1994, Director of Marketing and Sales
of Prudential Mutual Funds. Ms. Bibliowicz serves as president of 40
Smith Barney Mutual Funds. Her address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, age 39, Senior Vice President and Treasurer.
Managing Director of Smith Barney; Director and Senior Vice President of
SBMFM. Mr. Daidone serves as Senior Vice President and Treasurer of 42
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
John G. Goode, age 52, Vice President and Investment Officer.
Managing Director of Smith Barney. Chairman and Chief Investment
Officer of Davis Skaggs Investment Management, a division of SBMFM. His
address is One Sansome Street, 36th Floor, San Francisco, California
94104.
Peter Hable, age 38, Investment Officer. Managing Director of
SBMFM and President of Davis Skaggs Investment Management, a division of
SBMFM. His address is One Sansome Street, 36th Floor, San Francisco,
California 94104.
Christina T. Sydor, age 45, Secretary. Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM. Ms. Sydor serves as
Secretary of 42 Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
As of January 8, 1997, the Directors and Officers of the Fund as a
group, owned less than 1.00% of the outstanding common stock of the
Fund. No officer, director or employee of Smith Barney or of its parent
or any subsidiary receives any compensation from the Fund for serving as
an officer or Director of the Fund. The Fund pays each Director who is
not an officer or employee of Smith Barney or any of its affiliates a
fee of $6,000 per annum plus $1,000 for each in-person meeting and $100
per telephonic meeting. All Directors are reimbursed for travel and
out-of-pocket expenses. During the fiscal year ended September 30, 1996,
such expenses totalled $10,698.42.
For the fiscal year ended September 30, 1996, the Directors of the Fund
were paid the following compensation:
Director
Aggregate Compensation
from the Fund
Compensation from all
Smith Barney Mutual
Funds*
Lloyd J. Andrews+
$10,850
$10,600
Robert M. Frayn, Jr.+
10,750
10,500
Leon P. Gardner
9,850
9,500
Howard J. Johnson+
10,850
10,600
David E. Maryatt+
10,750
10,500
Heath B. McLendon
--
--
Frederick O. Paulsell+
10,750
10,500
Jerry A. Viscione
10,850
10,600
Julie W. Weston
9,850
9,600
* Reflects compensation paid during the calendar year ended December 31,
1996.
+ Pursuant to the Fund's deferred compensation plan, the Director has
elected to defer some or all of the compensation due him from the Fund
for the 1996 calendar year.
Investment Adviser and Administrator -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to an
investment advisory agreement dated July 30, 1993 (the "Advisory
Agreement"), which was first approved by the Fund's Board of Directors,
including a majority of the Directors who are not "interested persons"
of the Fund or SBMFM ("Independent Directors"), on April 7, 1993 and by
shareholders on June 22, 1993 and was most recently approved by the
Board, including a majority of the Independent Directors, on September
24, 1996. The services provided by SBMFM under the Advisory Agreement
are described in the Prospectus under "Management of the Fund." SBMFM
bears all expenses in connection with the performance of its services
and pays the salary of any officer or employee who is employed by both
it and the Fund. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"), which is in turn a wholly owned subsidiary
of The Travelers Group Inc. ("Travelers"). As compensation for
investment advisory services, the Fund pays SBMFM a fee, computed daily
and paid monthly, at the annual rate of 0.55% of the value of the Fund's
average daily net assets. SBMFM bears all of its expenses in connection
with the performance of its services. For the fiscal years ended
September 30, 1996, 1995 and 1994, the Fund incurred $6,015,090,
$4,135,113 and $2,559,267, respectively, in investment advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a
written agreement dated June 28, 1994 (the "Administration Agreement"),
which was first approved by the Fund's Board, including a majority of
the Independent Directors on June 28, 1994 and was most recently
approved by the Board, including a majority of the Independent
Directors, on September 24, 1996. SBMFM pays the salary of any officer
and employee who is employed by both it and the Fund and bears all
expenses in connection with the performance of its services. As
compensation for administrative services rendered to the Fund, SBMFM
receives a fee, computed daily and paid monthly, at the annual rate of
0.20% of the value of the Fund's average daily net assets.
Certain services provided to the Fund by SBMFM pursuant to the
Administration Agreement are described in the Prospectus under
"Management of the Fund." In addition to those services, SBMFM pays the
salaries of all officers and employees who are employed by both it and
the Fund, maintains office facilities for the Fund, furnishes the Fund
with statistical and research data, clerical help and accounting, data
processing, bookkeeping, internal auditing and legal services and
certain other services required by the Fund, prepares reports to the
Fund's shareholders and prepares tax returns, reports to and filings
with the Securities and Exchange Commission (the "SEC") and state Blue
Sky authorities. SBMFM bears all expenses in connection with the
performance of its services.
The Fund bears expenses incurred in its operation, including
taxes, interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or employees of
Smith Barney or SBMFM; SEC fees and state Blue Sky qualification fees;
charges of custodians; transfer and dividend disbursing agent's fees;
certain insurance premiums; outside auditing and legal expenses; costs
of maintenance of corporate existence; investor services (including
allocated telephone and personnel expenses); costs of preparation and
printing of prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders and
costs of shareholders' reports and corporate meetings.
SBMFM has agreed that if in any fiscal year the aggregate expenses
of the Fund (including fees paid pursuant to the Advisory Agreement and
Administration Agreement, but excluding interest, taxes, brokerage fees
paid pursuant to the Fund's services and distribution plan and, with the
prior written consent of the necessary state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, SBMFM will, to the extent required by
state law, reduce its management fees by such excess expense. Such fee
reductions, if any, will be reconciled on a monthly basis.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund. The
Independent Directors of the Fund have selected Stroock & Stroock &
Lavan as their legal counsel.
Deloitte & Touche LLP, independent public accountants, 2 World
Financial Center, New York, New York 10281, serve as auditors of the
Fund and render an opinion on the Fund's financial statements annually.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve its objective. This section contains
supplemental information concerning the types of securities and other
instruments in which the Fund may invest, the investment policies and
portfolio strategies that the Fund may utilize and certain risks
attendant to such investments, policies and strategies.
The Fund's primary investment objective is long-term capital
growth. Current income is a secondary objective. The Fund seeks to
achieve its objective through investment in common stocks and common
stock equivalents, including preferred stocks and other securities
convertible into common stocks. The Fund also invests to a lesser extent
in bonds and other debt instruments. There is no guarantee that the Fund
will achieve its investment objective.
SBMFM places emphasis on securities which, in its judgment, are
undervalued in the marketplace and, accordingly, have above-average
growth potential. Undervaluation of a security can result from a variety
of factors, such as a lack of investor recognition of (a) the underlying
value of a company's fixed assets, (b) the value of a consumer or
commercial franchise, (c) changes in the economic or financial
environment particularly affecting a company, (d) new, improved or
unique products or services, (e) new or rapidly expanding markets, (f)
changes in management of a company, (g) technological developments or
advancements affecting a company or its products or (h) changes in
governmental regulations, political climate or competitive conditions.
In general, the Fund will invest in securities of companies which
temporarily are unpopular among investors but which SBMFM regards as
possessing favorable prospects for earnings growth and/or improvement in
the value of their assets and, consequently, as having a reasonable
likelihood of experiencing a recovery in market price. Secondary
consideration will be given to a company's dividend record and the
potential for an improved dividend return.
Because securities markets typically are influenced (and, to some
extent, dominated) by institutional investors, undervalued securities in
which the Fund invests may tend to be those of less well-established
companies or companies whose capitalizations are less than the
capitalizations of larger, better-known companies. To the extent
securities held in the Fund's portfolio do not attract investor
interest, these investments may not participate in rising securities
markets. By the same token, in many instances the selection of
undervalued securities for investment may involve a smaller risk of
capital loss because such lack of investor interest is reflected in the
price of the securities at the time of purchase.
Foreign Securities and American Depository Receipts
The Fund has the authority to invest up to 25% of its assets in
foreign securities and American Depository Receipts ("ADRs"). ADRs are
dollar-denominated receipts issued generally by domestic banks
representing the deposit with the bank of a security of a foreign
issuer. ADRs are publicly traded on national securities exchanges or
over-the-counter in the United States.
Investing in the securities of foreign companies involves special
risks and considerations not typically associated with investing in U.S.
companies. These include differences in accounting, auditing and
financial reporting standards, generally higher commission rates on
foreign portfolio transactions, the possibility of expropriation or
confiscatory taxation, adverse changes in investment or exchange control
regulations, political instability which could affect U.S. investments
in foreign countries, and potential restrictions on the flow of
international capital. Additionally, foreign securities often trade with
less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Many of the foreign securities held by
the Fund will not be registered with, nor will the issuers thereof be
subject to the reporting requirements of, the SEC. Accordingly, there
may be less publicly available information about the securities and
about the foreign company issuing them than is available about a
domestic company and its securities. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payment
positions. The Fund may invest in securities of foreign governments (or
agencies or subdivisions thereof), and therefore many, if not all, of
the foregoing considerations apply to such investments as well.
Lending of Portfolio Securities
As discussed in the Prospectus, the Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. Such loans, if and when made, may not exceed 20% of the
Fund's total assets. The Fund may not lend its portfolio securities to
Smith Barney or its affiliates unless it has applied for and received
specific authority from the SEC. Loans of portfolio securities by the
Fund will be collateralized by cash, letters of credit or securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. government securities"), which will be
maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. From time to time, the
Fund may return 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 or with Smith Barney, and
which is acting as a "finder."
In lending its portfolio securities, the 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 government securities are used as collateral. Requirements
of the SEC, which may be subject to future modifications, currently
provide that the following conditions must be met whenever 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 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 an amount equal to 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; however, if a material event
adversely affecting the investment occurs, the Fund's Board of Directors
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 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 SBMFM to be of good standing and will
not be made unless, in the judgment of SBMFM, the consideration to be
earned from such loans would justify the risk.
Money Market Instruments
As stated in the Prospectus, the Fund may invest for temporary
defensive purposes in corporate and government bonds and notes and money
market instruments. Money market instruments in which the Fund may
invest include: U.S. government securities; certificates of deposit,
time deposits and bankers' acceptances issued by domestic banks
(including their branches located outside the United States and
subsidiaries located in Canada), domestic branches of foreign banks,
savings and loan associations and similar institutions; high grade
commercial paper; and repurchase agreements with respect to the
foregoing types of instruments. The following is a more detailed
description of such money market instruments.
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. Bankers' acceptances are time
drafts drawn on commercial banks by borrowers usually in connection with
international transactions.
Domestic commercial banks organized under Federal law are
supervised and examined by the Comptroller of the Currency and are
required to be members of the Federal Reserve System and to be insured
by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only
if they elect to join. Most state banks are insured by the FDIC
(although such insurance may not be of material benefit to the Fund,
depending upon the principal amounts of CDs of each bank held by the
Fund) and are subject to Federal examination and to a substantial body
of Federal law and regulation. As a result of governmental regulations,
domestic branches of domestic banks are generally required to, among
other things, maintain specified levels of reserves, and are subject to
other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of domestic banks, such as CDs and
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 government regulation. Such obligations are subject to different
risks than are those of domestic banks or domestic 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 domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic 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 domestic bank than
about a domestic bank. CDs issued by wholly owned Canadian subsidiaries
of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic 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 governmental
regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic 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 domestic branch of a foreign
bank than about a domestic bank.
In view of the foregoing factors associated with the purchase of
CDs and TDs issued by foreign branches of domestic banks or by domestic
branches of foreign banks, SBMFM will carefully evaluate such
investments on a case-by-case basis.
Savings and loan associations whose CDs may be purchased by the
Fund are supervised by the Office of Thrift Supervision and are insured
by the Savings Association Insurance Fund, which is administered by the
FDIC and is backed by the full faith and credit of the U.S. government.
As a result, such savings and loan associations are subject to
regulation and examination.
Options, Futures and Currency Strategies.
The Fund may use forward currency contracts and certain options
and futures strategies to attempt to hedge its portfolio, i.e., reduce
the overall level of investment risk normally associated with the Fund.
There can be no assurance that such efforts will succeed.
In order to assure that the Fund will not be deemed to be a
"commodity pool" for purposes of the Commodity Exchange Act, regulations
of the Commodity Futures Trading Commission ("CFTC") require that the
Fund enter into transactions in futures contracts and options on futures
only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the
aggregate initial margin and premiums on such non-hedging positions do
not exceed 5% of the liquidation value of the Fund's assets. The Fund,
however, does not intend to use such instruments for non-hedging
purposes. To attempt to hedge against adverse movements in exchange
rates between currencies, the Fund may enter into forward currency
contracts for the purchase or sale of a specified currency at a
specified future date. Such contracts may involve the purpose or sale
of a foreign currency against the U.S. dollar or may involve two foreign
currencies. The Fund may enter into forward currency contracts either
with respect to specific transactions or with respect to its portfolio
positions. For example, when the investment adviser anticipates making
a purchase or sale of a security, it may enter into a forward currency
contract in order to set the rate (either relative to the U.S. dollar or
another currency) at which the currency exchange transaction related to
the purchase or sale will be made ("transaction hedging"). Further,
when the investment adviser believes that a particular currency may
decline compared to the U.S. dollar or another currency, the Fund may
enter into a forward contract to sell the currency the investment
adviser expects to decline in an amount approximating the value of some
or all of the Fund's securities denominated in that currency, or when
the investment adviser believes that one currency may decline against a
currency in which some or all of the portfolio securities held by the
Fund are denominated, it may enter into a forward contract to buy the
currency expected to decline for a fixed amount ("position hedging").
In this situation, the Fund may, in the alternative, enter into a
forward contract to sell a different currency for a fixed amount of the
currency expected to decline where the investment manager believes that
the value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the value of the currency in
which portfolio securities of the Fund are denominated ("cross
hedging"). The Fund's (i) custodian places cash, (ii) U.S. Government
securities or (iii) equity securities or debt securities (of any grade)
in certain currencies provided such assets are liquid, unencumbered and
market to market daily, or other high-quality debt securities
denominated in certain currencies in a separate account of the Fund
having a value equal to the aggregate amount of the Fund's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the securities placed in a separate
account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the amount will equal the
amount of the Fund's commitments with respect to such contracts.
For hedging purposes, the Fund may write covered call options and
purchase put and call options on currencies to hedge against movements
in exchange rates and on debt securities to hedge against the risk of
fluctuations in the prices of securities held by the Fund or which the
investment adviser intends to include in its portfolio. The Fund also
may use interest rates futures contracts and options thereon to hedge
against changes in the general level in interest rates.
The Fund may write call options on securities and currencies only
if they are covered, and such options must remain covered so long as the
Fund is obligated as a writer. A call option written by the Fund is
"covered" if the Fund owns the securities or currency underlying the
option or has an absolute and immediate right to acquire that security
or currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities or currencies held in its
portfolio. A call option is also covered if the Fund holds on a share-
for-share basis a call on the same security or holds a call on the same
currency as the call written where the exercise price of the call held
is equal to less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other high-grade,
short-term obligations in a segregated account with its custodian.
Although the portfolio might not employ the use of forward
currency contracts, options and futures, the use of any of these
strategies would involve certain investment risks and transaction costs
to which it might not otherwise be subject. These risks include:
dependence on the investment adviser's ability to predict movements in
the prices of individual debt securities, fluctuations in the general
fixed-income markets and movements in interest rates and currency
markets, imperfect correlation between movements in the price of
currency, options, futures contracts or options thereon and movements in
the price of the currency or security hedged or used for cover; the fact
that skills and techniques needed to trade options, futures contracts
and options thereon or to use forward currency contracts are different
from those needed to select the securities in which the Fund invests;
lack of assurance that a liquid market will exist for any particular
option, futures contract or options thereon at any particular time and
possible need to defer or accelerate closing out certain options,
futures contracts and options thereon in order to continue to qualify
for the beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Dividends, Distributions and Taxes."
Options on Securities
As discussed more generally above, the Fund may engage in the
writing of covered call options. The Fund may also purchase put options
and enter into closing transactions.
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. 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 the 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 the Fund will normally have expiration dates
between one and six months from the date written. The exercise price of
the options may be below, equal to, or above the current 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.
The Fund may write (a) in-the-money call options when SBMFM
expects the price of the underlying security to remain flat or decline
moderately during the option period, (b) at-the-money call options when
SBMFM expects the price of the underlying security to remain flat or
advance moderately during the option period and (c) out-of-the-money
call options when SBMFM expects that the price of the 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 as such call options are
used in equivalent transactions.
So long as the obligation of the 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 it 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. The 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, the Fund will be required to
deposit in escrow the underlying security or other assets in accordance
with the rules of the Options Clearing Corporation ("Clearing
Corporation") or similar clearing corporation and the securities
exchange on which the option is written.
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. The Fund expects
to write options only on national securities exchanges or in the over-
the-counter market. The Fund may purchase put options issued by the
Clearing Corporation or in the over-the-counter market.
The Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which the 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 the
Fund has purchased an option and engages in a closing sale transaction,
whether it recognizes a profit or loss will depend upon whether the
amount received in the closing sale transaction is more or less than the
premium the Fund initially paid for the original option plus the related
transaction costs.
Although the Fund generally will purchase or write only those
options for which SBMFM believes there is an active secondary market so
as to facilitate closing transactions, 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. In the past, for example, higher than anticipated
trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the Clearing Corporation and
national securities exchanges inadequate 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, as a covered call option
writer, the Fund 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 which may
be held or written, or exercised within certain 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 Fund and other clients of SBMFM
and certain of their affiliates may be considered to be such a group. A
securities exchange may order the liquidation of positions found to be
in violation of these limits, and it may impose certain other sanctions.
In the case of options written by the Fund that are deemed covered
by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and
obtain physical delivery of the underlying common stocks with respect to
which the Fund has written options may exceed the time within which the
Fund must make delivery in accordance with an exercise notice. In these
instances, the Fund may purchase or temporarily borrow 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.
Although SBMFM will attempt to take appropriate measures to
minimize the risks relating to the Fund's writing of call options and
purchasing of put and call options, there can be no assurance that the
Fund will succeed in its option-writing program.
Stock Index Options
As described generally above, the Fund may purchase put and call
options and write call options on domestic stock indexes listed on
domestic exchanges in order to realize its investment objective of
capital appreciation or 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 the
Canadian Market Portfolio 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 American Stock Exchange Oil and Gas Index or the
Computer and Business Equipment Index.
Options on stock indexes are generally similar to options on stock
except that 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 or a foreign currency,
as the case may be, 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 the securities portfolio of the Fund 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 the 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 the Fund of options on stock indexes will
be subject to SBMFM'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 price of individual stocks.
Futures Contracts and Options on Futures Contracts
As described generally above, the Fund may invest in stock index
futures contracts and options on futures contracts that are traded on a
domestic exchange or board of trade. These investments may be made by
the Fund solely for the purpose of hedging against changes in the value
of its portfolio securities due to anticipated changes in interest rates
and market conditions and not for purposes of speculation.
The purpose of entering into a futures contract by the Fund is to
protect the Fund from fluctuations in the value of securities without
actually buying or selling the securities. For example, in the case of
stock index futures contracts, if the Fund anticipates an increase in
the price of stocks that it intends to purchase at a later time, the
Fund could enter into contracts to purchase the stock index (known as
taking a "long" position) as a temporary substitute for the purchase of
stocks. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts increases and
thereby serves as a hedge against the Fund's not participating in a
market advance. The Fund then may close out the futures contracts by
entering into offsetting futures contracts to sell the stock index
(known as taking a "short" position) as it purchases individual stocks.
The Fund can accomplish similar results by buying securities with long
maturities and selling securities with short maturities. But by using
futures contracts as an investment tool to reduce risk, given the
greater liquidity in the futures market, it may be possible to
accomplish the same result more easily and more quickly.
No consideration will be paid or received by the Fund upon the
purchase or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker 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 exchange or board of trade on
which the contract is traded and brokers or members of such board of
trade may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund, upon termination of the
futures contract, assuming all contractual obligations have been
satisfied. Subsequent payments, known as "variation margin," to and from
the broker, will be made daily as the price of the index or securities
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." In addition, when the Fund enters into a long
position in a futures contract or an option on a futures contract, it
must deposit into a segregated account with the Fund's custodian an
amount of cash or cash equivalents equal to the total market value of
the underlying futures contract, less amounts held in the Fund's
commodity brokerage account at its broker. At any time prior to the
expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to terminate
the Fund's existing position in the contract.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures contracts by
the Fund is subject to the ability of SBMFM to predict correctly
movements in the stock market or in the direction of interest rates.
These predictions involve skills and techniques that may be different
from those involved in the management of investments in securities. In
addition, there can be no assurance that there will be a perfect
correlation between movements in the price of the securities underlying
the futures contract and movements in the price of the securities that
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 market behavior or interest rates.
Positions in futures contracts may be closed out only on the
exchange on which they were entered into (or through a linked exchange)
and no secondary market exists for those contracts. In addition,
although the Fund intends to enter into futures contracts only if there
is an active market for the 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, the Fund would be required to make daily cash
payments of variation margin; in such circumstances, 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, no assurance can be given that the price of
the securities being hedged will correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures
contract.
Investment Restrictions
The Fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions 1 through 9 cannot be changed
without approval by the holders of a majority of the outstanding shares
of the Fund, defined as the lesser of (a) 67% of the Fund's shares
present at a meeting, if the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (b) more than 50% of the
Fund's outstanding shares. The remaining restrictions may be changed by
the Fund's Board of Directors at any time. The Fund may not:
1. With respect to 75% of the value of its total assets, invest
more than 5% of its total assets in securities of any one issuer,
except securities issued or guaranteed by the U.S. government, or
purchase more than 10% of the outstanding voting securities of
such issuer.
2. Issue senior securities as defined in the 1940 Act, and any
rules and orders thereunder, except insofar as the Fund may be
deemed to have issued senior securities by reason of: (a)
borrowing money or purchasing securities on a when-issued or
delayed-delivery basis; (b) purchasing or selling futures
contracts and options on future contracts and other similar
instruments; and (c) issuing separate classes of shares.
3. Invest more than 25% of its total assets in securities, the
issuers of which are in the same industry. For purposes of this
limitation, U.S. government securities and securities of state or
municipal governments and their political subdivisions are not
considered to be issued by members of any industry.
4. Borrow money, except that 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, in an amount not exceeding 10%
of the value of the Fund's total assets (including the amount
borrowed) valued at market less liabilities (not including the
amount borrowed) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any additional investments.
5. Engage in the business of underwriting securities issued by
other persons, except to the extent that the Fund may technically
be deemed to be an underwriter under the Securities Act of 1933,
as amended, in disposing of portfolio securities.
6. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales
of portfolio securities) or sell any securities short (except
against the box). For purposes of this restriction, the deposit or
payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options and options on
securities is not considered to be the purchase of a security on
margin.
7. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this shall not prevent the
Fund from: (a) investing in real estate investment trust
securities traded on the New York Stock Exchange, Inc. ("NYSE"),
American Stock Exchange or the National Association of Securities
Dealers, Inc.'s Automated Quotation System; (b) investing in
securities of issuers engaged in the real estate business and
securities which are secured by real estate or interests therein;
or (c) holding or selling real estate received as a result of a
default on securities it holds.
8. Make loans of its funds or securities. 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 as described in the Prospectus and this
Statement of Additional Information under "Investment Objective
and Management Policies."
9. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof or engage in transactions involving futures
contracts and related options, except as permitted under the
Fund's investment goals and policies, as set forth in the current
Prospectus and the Statement of Additional Information.
10. Invest more than 5.00% of the value of the Fund's total
assets in the securities of any issuer which has been in
continuous operation for less than three years. This restriction
does not apply to U.S. government securities.
11. 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 investment in closed-
end, publicly traded investment companies.
12. Invest in interests in oil, gas or other mineral exploration
or development programs (except that the Fund may invest in the
securities of issuers which operate, invest in or sponsor such
programs).
13. Purchase or retain the securities of any issuer if, to the
knowledge of the Fund, any officer or Director of the Fund or of
SBMFM owns beneficially more than 1/2 of 1.00% of the outstanding
securities of such issuer and the persons so owning more than 1/2
of 1.00% of such securities together own beneficially more than
5.00% of such securities.
14. Purchase warrants if, thereafter, more than 2.00% of the
value of the Fund's net assets would consist of such warrants, but
warrants attached to other securities or acquired in units by the
Fund are not subject to this restriction.
15. Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in securities
that are illiquid.
16. Invest in any company for the purpose of exercising control
or management.
17. Purchase or sell real estate limited partnership interests.
Certain restrictions listed above permit the Fund without
shareholder approval to engage in investment practices that the Fund
does not currently pursue. The Fund has no present intention of altering
its current investment practices as otherwise described in the
Prospectus and this Statement of Additional Information and any future
change in those practices would require Board approval. If any
percentage restriction described above is complied with at the time of
an investment, a later increase or decrease in percentage resulting from
a change in values or assets will not constitute a violation of the
restriction. The Fund may make commitments more restrictive than the
fundamental restrictions listed above so as to permit the sale of Fund
shares in certain states. Should the Fund determine that any such
commitment is no longer in the best interests of the Fund and its
shareholders, it will revoke the commitment by terminating sales of its
shares in the states involved.
Portfolio Turnover
While the Fund does not intend to trade in securities for short-
term profits, securities may be sold without regard to the amount of
time they have been held by the Fund when warranted by the
circumstances. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for a
year by the monthly average value of portfolio securities for the year.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation. A portfolio turnover rate
of 100% would occur, for example, if all the securities in the Fund's
portfolio were replaced once during a period of one year. A high rate of
portfolio turnover in any year will increase brokerage commissions paid
and could result in high amounts of realized investment gain subject to
the payment of taxes by shareholders. Any realized short-term investment
gain will be taxed to shareholders as ordinary income. For the 1996 and
1995 fiscal years, the Fund's portfolio turnover rates were 57% and 45%,
respectively.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by
SBMFM, subject to the overall supervision and review of the Fund's Board
of Directors. Portfolio securities transactions for the Fund are
effected by or under the supervision of SBMFM.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There generally is no stated commission in the
case of securities traded in the over-the-counter markets, but the price
of those securities includes an undisclosed commission or mark-up. 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 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. For the fiscal years ended
September 30, 1996, 1995 and 1994, the Fund paid total brokerage
commissions of $2,132,627, $953,849 and $1,334,383, respectively.
In executing portfolio transactions and selecting brokers or
dealers, it is the Fund's policy to seek the best overall terms
available. The Advisory Agreement between the Fund and SBMFM provides
that, in assessing the best overall terms available for any transaction,
SBMFM shall consider the factors it deems relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer,
and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. In addition, the Advisory
Agreement authorizes SBMFM, 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) provided to the Fund and/or other accounts over which SBMFM or an
affiliate exercises investment discretion.
The Fund's Board of Directors periodically will review the
commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the
benefits inuring to the Fund. It is possible certain of the services
received will primarily benefit one or more other accounts for which
investment discretion is exercised. Conversely, the Fund may be the
primary beneficiary of services received as a result of portfolio
transactions effected for other accounts. SBMFM's fee under the Advisory
Agreement is not reduced by reason of SBMFM's receiving such brokerage
and research services. Further, Smith Barney will not participate in
commissions from brokerage given by the Fund to other brokers or dealers
and will not receive any reciprocal brokerage business resulting
therefrom.
The Fund's Board of Directors has determined that any portfolio
transaction for the Fund may be executed through Smith Barney if, in
SBMFM's judgment, the use of Smith Barney is likely to result in price
and execution at least as favorable as those of other qualified brokers,
and if in the transaction, Smith Barney charges the Fund a commission
rate consistent with those charged by Smith Barney to comparable
unaffiliated customers in similar transactions. In addition, under rules
recently adopted by the SEC, Smith Barney may directly execute such
transactions for the Fund on the floor of any national securities
exchange, provided: (i) the Board of Directors has expressly authorized
Smith Barney to effect such transactions; and (ii) Smith Barney annually
advises the Fund of the aggregate compensation it earned on such
transactions. For the fiscal years ended September 30, 1996, 1995 and
1994, the Fund paid $80,904, $12,132 and $3,000, respectively, in
brokerage commissions to Smith Barney (formerly Shearson Lehman
Brothers.) The percentage of registrant's aggregate brokerage
commissions paid for the fiscal year ended September 30, 1996 was 2.95%
and the percentage of registrant's aggregate dollar amount of
transactions involving the payment of commissions effected for the
fiscal year ended September 30, 1996 was 1.19%.
While investment decisions for the Fund are made independently
from those of the other accounts managed by SBMFM, or certain affiliates
of SBMFM, investments of the type the Fund may make also may be made by
such other accounts. In such instances, available investments or
opportunities for sales will be allocated in a manner believed by SBMFM
to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the
position obtained for or disposed of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any "purchaser," which is
defined to include the following: (a) an individual; (b) an individual's
spouse and his or her children purchasing shares for his or her own
account; (c) a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified under Section 401(a) of the
Code, and qualified employee benefit plans of employers who are
"affiliated persons" of each other within the meaning of the 1940 Act;
(e) tax-exempt organizations enumerated in Section 501(c)(3) or (13) of
the Code; and (f) a trustee or other professional fiduciary (including a
bank, or an investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended) purchasing shares of the
Fund for one or more trust estates or fiduciary accounts. Purchasers who
wish to combine purchase orders to take advantage of volume discounts on
Class A shares should contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares if the aggregate
investment in Class A shares of the Fund and in Class A shares of other
Smith Barney Mutual Funds that are offered with an initial sales charge,
including the purchase being made, of any purchaser is $25,000 or more.
The reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate records. The Fund reserves the
right to terminate or amend the combined right of accumulation at any
time after written notice to shareholders. For further information
regarding the combined right of accumulation, shareholders should
contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis.
The public offering price for Class A shares of the Fund is equal to the
net asset value per share at the time of purchase plus an initial sales
charge based on the aggregate amount of the investment. The public
offering price for Class B, Class C and Class Y shares (and Class A
share purchases, including applicable rights of accumulation, equaling
or exceeding $500,000) is equal to the net asset value per share at the
time of purchase and no sales charge is imposed at the time of purchase.
A contingent deferred sales charge ("CDSC"), however, is imposed on
certain redemptions of Class B and Class C shares, and of Class A shares
when purchased in amounts equaling or exceeding $500,000. The method of
computation of the public offering price is shown in the Fund's
financial statements incorporated by reference in their entirety into
this Statement of Additional Information.
REDEMPTION OF SHARES
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 or holiday closings), (b) when trading in markets
the 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 protection of
the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining shareholders 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 1.00% of the Fund's net assets by distribution in kind of
portfolio securities in lieu of cash. Securities issued as a
distribution in kind may incur brokerage commissions when shareholders
subsequently sell those securities.
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
the Fund as may be necessary to cover the stipulated withdrawal payment.
Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to
Withdrawal Plans in effect prior to November 7, 1994, any applicable
CDSC will be waived on amounts withdrawn that do not exceed 2.00% per
month of the value of a shareholder's shares that are subject to a
CDSC). To the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments will reduce the shareholder's investment and
ultimately may 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 he or she is participating in
the Withdrawal Plan, purchases by such shareholders in amounts of less
than $5,000 ordinarily will not be permitted.
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
reinvested automatically at net asset value in additional shares of the
Fund. 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 additional information, shareholders should contact a
Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts
basis pursuant to a written agreement dated July 30, 1993 (the
"Distribution Agreement") which was most recently approved by the Fund's
Board of Directors on September 24, 1996. For the fiscal years ended
September 30, 1996, 1995 and 1994, Smith Barney and/or Shearson Lehman
Brothers received $1.0 million, $808,600 and $793,438, respectively, in
sales charges from the sale of Class A shares and did not reallow any
portion thereof to dealers. For the fiscal years ended September 30,
1996, 1995 and 1994, Smith Barney (formerly Shearson Lehman Brothers)
received $844,000, $820,900 and $36,283, respectively, representing CDSC
fees on redemptions of the Fund's Class B shares. For the fiscal year
ended September 30, 1996, Smith Barney received $10,000, representing
CDSC fees on redemptions of the Fund's Class C shares.
When payment is made by the investor before 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 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 Smith Barney Exchange
Reserve Fund) of the Smith Barney Mutual Funds. If the investor
instructs Smith Barney to invest the funds in a Smith Barney money
market fund, the amount of the investment will be included as part of
the average daily net assets of both the Fund and the Smith Barney money
market fund, and affiliates of Smith Barney that serve the funds in an
investment advisory or administrative capacity will benefit from the
fact that they are receiving fees from both such investment companies
for managing these assets computed on the basis of their average daily
net assets. The Fund's Board of Directors has been advised of the
benefits to Smith Barney resulting from these settlement procedures and
will take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
Distributions Arrangements
To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Fund has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual
rate of 0.25% of the value of the Fund's average daily net assets
attributable to the Class A, Class B and Class C shares. In addition,
the Fund pays Smith Barney a distribution fee with respect to the Class
B and Class C shares primarily intended to compensate Smith Barney for
its initial expense of paying financial consultants a commission upon
sales of those shares. The Class B and Class C distribution fee is
calculated at the annual rate of 0.75% of the value of the Fund's
average daily net assets attributable to the shares of the respective
Class.
For the fiscal year ended September 30, 1996, the Fund's Class A,
Class B and Class C shares incurred $1,058,779, $1,557,497 and $84,657,
respectively, in service fees. For the fiscal year ended September 30,
1995, the Fund's Class A, Class B and Class C shares incurred $802,308,
$1,060,580 and $25,292, respectively, in service fees. For the fiscal
year ended September 30, 1994, the Fund's Class A, Class B and Class C
shares incurred $369,623, $791,709 and $1,971, respectively, in service
fees. In addition, for the fiscal year ended September 30, 1996,
September 30, 1995, and September 30, 1994, the Fund's Class B shares
incurred $4,672,493, $3,181,739 and $2,375,126, respectively, in
distribution fees. For the same period, the Fund's Class C shares
incurred $253,971, $75,876 and $5,914, respectively, in distribution
fees.
Under its terms, the Plan continues from year to year, provided
such continuance is approved annually by vote of the Fund's Board of
Directors, including a majority of the Independent Directors. The Plan
may not be amended to increase the amount of the service and
distribution fees without shareholder approval, and all material
amendments of the Plan also must be approved by the Directors and
Independent Directors in the manner described above. The Plan may be
terminated with respect to a class of the Fund (a "Class") at any time,
without penalty, by the vote of a majority of the Independent Directors
or by a vote of a majority of the outstanding voting securities of the
Class (as defined in the 1940 Act). Pursuant to the Plan, Smith Barney
will provide the Fund's Board of Directors 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, 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 the procedures used by the Fund in valuing its assets.
Securities listed on a national securities exchange will be valued
on the basis of the last sale on the date on which the valuation is made
or, in the absence of sales, at the mean between the closing bid and
asked prices. Over-the-counter securities will be valued on the basis of
the bid price at the close of business on each day, or, if market
quotations for those securities are not readily available, at fair
value, as determined in good faith by the Fund's Board of Directors.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Fund's
Board of Directors. Amortized cost involves valuing an instrument at its
original cost to the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the market value of the
instrument. All other securities and other assets of the Fund will be
valued at fair value as determined in good faith by the Fund's Board of
Directors.
EXCHANGE PRIVILEGE
Except as noted below and in the Prospectus, shareholders of any
of the Smith Barney Mutual Funds may exchange all or part of their
shares for shares of the same class of other Smith Barney Mutual Funds,
to the extent such shares are offered for sale in the shareholder's
state of residence, on the basis of relative net asset value per share
at the time of exchange as follows:
A. Class A shares of the Fund may be exchanged without a sales
charge for Class A shares of any of the Smith Barney Mutual Funds.
B. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares
of another Smith Barney Mutual Fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of calculating
CDSC rates and conversion periods, will be deemed to have been
held since the date the shares being exchanged were deemed to be
purchased.
C. Class C shares of any fund may be exchanged without a sales
charge. For purposes of CDSC applicability, Class C shares of the
Fund exchanged for Class C shares of another Smith Barney Mutual
Fund will be deemed to have been owned since the date the shares
being exchanged were deemed to be purchased.
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 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 the proceeds are immediately invested, at a
price as described above, in shares of the fund being acquired. 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.
PERFORMANCE DATA
From time to time, the Fund may quote total return of a Class in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include
data from the following industry and financial publications: Barrons',
Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The
Wall Street Journal. To the extent any advertisement or sales literature
of the Fund describes the expenses or performance of any Class it will
also disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return" figures 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.
Class A's average annual total return was as follows for the periods
indicated:
8.94% for the one-year period from October 1, 1995 through September
30, 1996;
14.39% for the five-year period from October 1, 1991 through September
30, 1996;
12.94% for the ten-year period from October 1, 1986 through September
30, 1996.
The average annual total return figures assume that the maximum
5.00% sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge of 5.00% had not been deducted at
the time of purchase, the average annual total return for the same
periods would have been 14.73%, 15.56%, and 13.51%, respectively.
Class B's average annual total return was as follows for the periods
indicated:
8.82% for the one-year period from October 1, 1995 through September
30, 1996.
14.85% for the period from November 6, 1992 (commencement of operations)
through September
30, 1996.
The average annual total return figures assume that the maximum
5.00% sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge of 5.00% had not been deducted at
the time of purchase, the average annual total return for the same
periods would have been 13.82%, and 15.19%, respectively.
Class C's average annual total return was as follows for the period
indicated:
12.82% for the one-year period from October 1, 1995 through September
30, 1996.
12.65% for the period from August 10, 1993 (commencement of operations)
through September 30, 1996.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are
computed by the following formula:
AGGREGATE TOTAL RETURN = ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5- or
10-year period at the end of the 1-, 5- or 10-
year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods
indicated:
14.73% for the one-year period from October 1, 1995 through September
30, 1996;
106.11% for the five-year period from October 1, 1991 through September
30, 1996;
255.24% for the ten-year period from October 1, 1985 through September
30, 1995.
These aggregate total return figures do not assume that the
maximum 5.00% sales charge has been deducted from the investment at the
time of purchase. If the maximum sales charge had been deducted at the
time of purchase, the Class A shares aggregate total return for the same
periods would have been 8.94%, 95.82% and 237.52%, respectively.
Class B's aggregate total return was as follows for the periods
indicated:
13.82% for the one-year period beginning on October 1, 1995 through
September 30, 1996;
73.64% for the period beginning November 6, 1992 (commencement of
operations) through September 30, 1996.
Class B's aggregate total return figures assume that the maximum
applicable CDSC has not been deducted from the investment at the time of
purchase. If the maximum applicable CDSC had been reflected, Class B's
aggregate total return for the same periods would have been 8.82% and
71.64%, respectively.
Class C's aggregate total return was as follows for the period
indicated:
13.82% for the period from October 1, 1994 through September 30,
1996;
45.40% for the period from August 10, 1993 (commencement of operations)
through September 30, 1996.
Performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio, operating expenses
and the expenses exclusively attributable to the 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 the Class' performance with that of other mutual
funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
It is important to note that the total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
TAXES
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. The
summary is not intended as a substitute for individual tax advice and
investors are urged to consult their own tax advisors as to the tax
consequences of an investment in the Fund.
The Fund has qualified and intends to continue to qualify each
year as a regulated investment company under the Code. Provided the Fund
(a) is a regulated investment company and (b) distributes at least 90%
of its net investment income (including, for this purpose, net realized
short-term capital gains), the Fund will not be liable for Federal
income taxes to the extent its net investment income and its net
realized long- and short-term capital gains, if any, are distributed to
its shareholders. Although the Fund expects to be relieved of all or
substantially all Federal, state, and local income or franchise taxes,
depending upon the extent of its activities in states and localities in
which its offices are maintained, in which its agents or independent
contractors are located, or in which it is otherwise deemed to be
conducting business, that portion of the Fund's income which is treated
as earned in any such state or locality could be subject to state and
local tax. Any such taxes paid by the Fund would reduce the amount of
income and gain available for distribution to shareholders. All of a
shareholder's dividends and distributions payable by the Fund will be
reinvested automatically in additional shares of the same Class of the
Fund at net asset value, unless the shareholder elects to receive
dividends and distributions in cash.
Gain or loss on the sale of a security by the Fund generally will
be long-term capital gain or loss if the Fund has held the securities
for more than one year. Gain or loss on the sale of securities held for
not more than one year will be short-term. If the Fund acquires a debt
security at a substantial discount, a portion of any gain upon the sale
or redemption will be taxed as ordinary income, rather than capital gain
to the extent it reflects accrued market discount.
Dividends of net investment income and distributions of net
realized 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. Dividends received by corporate
shareholders will qualify for the dividends-received deduction only to
the extent that the Fund designates the amount distributed as a dividend
and the amount so designated does not exceed the aggregate amount of
dividends received by the Fund from domestic corporations for the
taxable year. The Federal dividends-received deduction for corporate
shareholders may be further reduced or disallowed if the shares with
respect to which dividends are received are treated as debt-financed or
are deemed to have been held for less than 46 days.
Foreign countries may impose withholding and other taxes on
dividends and interest paid to the Fund with respect to investments in
foreign securities. However, certain foreign countries have entered into
tax conventions with the United States to reduce or eliminate such
taxes. Distributions of long-term capital gains will be taxable to
shareholders as such, whether paid in cash or reinvested in additional
shares and regardless of the length of time that the shareholder has
held his or her interest in the Fund. If a shareholder receives a
distribution taxable as long-term capital gain with respect to his or
her investment in the Fund and redeems or exchanges the shares before he
or she has held them for more than six months, any loss on the
redemption or exchange that is less than or equal to the amount of the
distribution will be treated as a long-term capital loss.
If a shareholder (a) incurs a sales charge in acquiring or
redeeming shares of the Fund, 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., an exchange privilege), the
original sales charge increases the shareholder's tax basis in the
original shares only to the extent the otherwise applicable sales charge
for the second acquisition is not reduced. The portion of the original
sales charge that does not increase the shareholder's tax basis in the
original shares would be treated as incurred with respect to the second
acquisition and, as a general rule, would increase the shareholder's tax
basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired shares 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.
Investors considering buying shares of the Fund just prior to a
record date for a taxable dividend or capital gain distribution should
be aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or
distribution payment, any such payment will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report his or her dividend or interest
income in full, 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, 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 Fund shares. An
individual's taxpayer identification number is his or her social
security number. The 31% backup withholding tax is not an additional
tax and may be credited against a shareholder's regular Federal income
tax liability.
Options Transactions. The tax consequences of options
transactions entered into by the Fund will vary depending on the nature
of the underlying security and whether the "straddle" rules, discussed
separately below, apply to the transaction. When the Fund writes a call
or put option on an equity or debt security, it will receive a premium
that will, subject to the "section 1256 contract" and straddle rules
discussed below, 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 short-term capital gain or loss, except that
any loss on a "qualified" covered call option not treated as part of a
straddle may be treated as long-term capital loss. If a call option
written by the Fund is exercised, the Fund will recognize a capital gain
or loss from the sale of the underlying security, and will treat the
premium as additional sales proceeds. Whether the gain or loss will be
long-term or short-term will depend on the holding period of the
underlying security. If a put option written by the Fund is exercised,
the amount of the premium will reduce the tax basis of the security the
Fund then purchases.
The Code imposes a special "mark-to-market" system for taxing
section 1256 contracts which include options on nonconvertible debt
securities (including U.S. government securities). In general, gain or
loss with respect to 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-market),
and the resulting gain or loss will be recognized for tax purposes.
Provided section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and 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 are actually held by the Fund.
In order to continue to qualify as a regulated investment company,
the Fund may have to limit its transactions in section 1256 contracts.
Straddles. The Code contains rules applicable to "straddles,"
that is, "offsetting positions in actively traded personal property."
Such personal property includes section 1256 contracts or other
investment contracts. Where applicable, the straddle rules generally
override the other provisions of the Code. In general, investment
positions will 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 covered call options would not be
treated as part of a straddle). The Fund is authorized to enter into
covered call and covered put positions. Depending on what other
investments are held by the Fund, at the time it enters into one of the
above transactions, the Fund may create a straddle for purposes of the
Code.
If two (or more) positions constitute a straddle, recognition of a
realized loss from one position (including a marked-to-market loss) must
be deferred to the extent of unrecognized gain in an offsetting
position. Also, long-term capital gain may be recharacterized as short-
term capital gain, or short-term capital loss as long-term capital loss.
Furthermore, interest and other carrying charges allocable to personal
property that is part of a straddle must be capitalized.
If the Fund chooses to identify a particular offsetting position
as being one component of a straddle, a realized loss on any component
of the straddle will be recognized no earlier than upon the liquidation
of all of the components of the straddle. Special rules apply to "mixed"
straddles (that is, straddles consisting of a section 1256 contract and
an offsetting position that is not a section 1256 contract). If the Fund
makes certain elections, the section 1256 contract components of such
mixed 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.
Wash Sales. "Wash sale" rules will apply to prevent the
recognition of loss with respect to a position where an identical or
substantially identical position is or has been acquired within a
prescribed period.
The foregoing is only a summary of certain Federal tax
considerations generally affecting the Fund and its shareholders and is
not intended as a substitute for careful tax planning. Shareholders are
urged to consult their tax advisors with specific reference to their own
tax situations, including their state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was originally incorporated under the laws of the State
of Washington on March 17, 1981, under the name Foster & Marshall
Growth Fund, Inc. On May 22, 1984, December 18, 1987, November 21, 1989,
August 12, 1992, August 17, 1993 and October 14, 1994, the Fund changed
its name to Shearson Fundamental Value Fund Inc., Shearson Lehman
Fundamental Value Fund Inc., SLH Fundamental Value Fund Inc., Shearson
Lehman Brothers Fundamental Value Fund Inc., Smith Barney Shearson
Fundamental Value Fund Inc., and Smith Barney Fundamental Value Fund
Inc. Without changing its name, the Fund was reincorporated as a
Maryland corporation on May 24, 1995.
PNC, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania, 19103, serves as the custodian of the Fund. Under its
agreement with the Fund, PNC holds the Fund's portfolio securities and
keeps all necessary accounts and records. For its services, PNC receives
a monthly fee based upon the month-end market value of securities held
in custody and also receives securities transaction charges. The assets
of the Fund are held under bank custodianship in compliance with the
1940 Act.
First Data, located at Exchange Place, Boston, Massachusetts
02109, serves as the Fund's transfer agent. Under the transfer agency
agreement, First Data maintains the shareholder account records for the
Fund, handles certain communications between shareholders and the Fund
and distributes dividends and distributions payable by the Fund. For
these services, First Data receives a monthly fee computed on the basis
of the number of shareholder accounts it maintains for the Fund during
the month and is reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended September 30,
1996 is incorporated herein by reference in its entirety.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended September 30, 1996
and the
Report of Independent Accountants is incorporated by reference to the filing
of
such
report pursuant to Rule 30b2-1 under the Investment Company Act of 1940 as
filed
with
the Securities and Exchange Commission on September 26, 1996 (Accession #
0000091155-
96-0005500).
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
All references are to the Registrant's registration statement on Form N-1A as
filed with
the Securities and Exchange Commission ("SEC"), File Nos. 2-71469 and 811-3158
(the
"Registration Statement").
(1)(a) Registrant's Articles of Incorporation dated May 13, 1994 are
incorporated by
reference to post-effective amendment no. 27 to the Registration Statement as
filed with the SEC on May 26, 1995 ("Post-Effective Amendment No. 27").
(1)(b) Registrant's Articles of Amendment dated May 24, 1995 are
incorporated
by reference to post-effective amendment no. 28 to the Registration Statement
as filed with the SEC on February 1, 1996 ("Post-Effective Amendment No.
28").
(2) Registrant's By-Laws are incorporated by reference to Post-Effective
Amendment No. 27.
(3) Inapplicable.
(4)(a) Registrant's form of stock certificate relating to Class A shares
are
incorporated by reference to Post-Effective Amendment No. 27.
(4)(b) Registrant's form of stock certificate relating to Class B shares
are
incorporated by reference to Post-Effective Amendment No. 27.
(4)(c) Registrant's form of stock certificate relating to Class C shares
are
incorporated by reference to Post-Effective Amendment No. 27.
(4)(d) Registrant's form of stock certificate relating to Class Y shares
are
incorporated by reference to Post-Effective Amendment No. 27.
(5) Form of Investment Advisory Agreement
with Smith Barney Mutual Funds Management Inc.
is incorporated by reference to Post-Effective Amendment No. 27.
(6) Form of Distribution Agreement between the Registrant
and Smith Barney Inc. is incorporated by reference to
Post-Effective Amendment No. 27.
(7) Inapplicable.
(8) Custodian Agreement with PNC Bank, National
Association to is incorporated by reference to
Post-Effective Amendment No. 27.
(9)(a) Form of Transfer Agency Agreement between the Registrant and The
Transfer Agent is incorporated by reference to Post-Effective Amendment No.
28.
(9)(b) Form of Consent to Assignment between the Registrant
and The Shareholder Services Group, Inc. is incorporated by reference
to Post-Effective Amendment No. 27.
(9)(d) Form of Administration Agreement between the Fund and
Smith Barney Mutual Funds Management Inc. is incorporated by
reference to Post-Effective Amendment No. 27.
(10) Opinion of Maryland Counsel is incorporated by reference to Post-
Effective
Amendment No. 27.
(11) Consent of Independent Accountants is filed herein.
(12) Inapplicable.
(13) Inapplicable.
(14) Prototype Self-Employed Retirement Plan is incorporated by reference to
post-effective amendment no. 10 to the Registration Statement as filed
with the SEC on November 29, 1987.
(15) Services and Distribution Plan between the Registrant and Smith Barney
Inc.
is incorporated by reference to Post-Effective Amendment No. 27.
(16) Performance Data is incorporated by reference to post-effective
amendment
no. 11 to the Registration Statement as filed with the SEC on December 5,
1988.
(17) Powers of Attorney are incorporated by reference to
Post-Effective Amendment No. 27
(18) Form of Rule 18f-3(d) Multiple Class Plan of the Registrant is
incorporated by
reference to Post Effective Amendment No. 28.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Title of Class Holders as of December 31, 1996
Common Stock par value $.001 per share
Class A Shares 37,401
Class B Shares 64,430
Class C Shares 4,415
Class Y Shares 4
Item 27. Indemnification
The response to this item is incorporated by reference to Post-Effective
Amendment No. 5 to the Registration Statement as filed with the SEC.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc. Smith Barney
Mutual Funds Management Inc. ("SBMFM"), formerly known as Smith, Barney
Advisers, Inc.,) was incorporated in December 1968 under the laws of the State
of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly
owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation)
("Travelers"). SBMFM is registered as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act") and has, through
its predecessors, been in the investment counseling business since 1934.
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business,
profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two fiscal
years, is incorporated by reference to Schedules A and D of
FORM ADV filed by SBA pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as
distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney
California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Aggressive
Growth Fund Inc.,
Smith Barney Appreciation Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Managed Governments Fund Inc.,
Smith Barney Income Funds,
Smith Barney Equity Funds, Smith Barney Investment Funds
Inc., Smith Barney Natural Resources Fund Inc., Smith Barney
Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Fundamental Value Fund
Inc., Smith Barney Series Fund, Consulting Group
Capital Markets Funds, Smith Barney Investment
Trust, Smith Barney Adjustable Rate Government Income Fund,
Smith Barney Oregon Municipals Fund, Smith Barney Funds, Inc.,
Smith Barney Muni Funds, Smith Barney World Funds, Inc., Smith
Barney Money Funds, Inc., Smith Barney Municipal
Money Market Fund, Inc., Smith Barney Variable
Account Funds, Smith Barney U.S. Dollar Reserve Fund
(Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda),
Smith Barney Institutional Cash Management Fund, Inc.
and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney
Holdings
Inc. (formerly known as Smith Barney Shearson Holdings
Inc.), which in turn is a
wholly owned subsidiary of Travelers Group Inc. (formerly
known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney
changed its
name from Smith Barney Shearson Inc. to its current name.
The information
required by this Item 29 with respect to each director,
officer and partner
of Smith Barney is incorporated by reference to Schedule A
of FORM BD filed
by Smith Barney pursuant to the Securities Exchange Act of
1934 (SEC File
No. 812-8510).
Item 30. Location of Accounts and Records
(1) With respect to the Registrant, its Distributor,
Investment Adviser and Administrator:
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(2) With respect to the Registrant's Custodian:
PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania
(3) With respect to the Registrant's Transfer Agent:
First Data Investor Services Group Inc.
Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to call a meeting of its shareholders for the
purpose of voting upon the question of removal of a director or directors
of Registrant when requested in writing to do so by the holders of
at least 10% of Registrant's outstanding shares. Registrant undertakes
further to assist shareholders in communicating
with other shareholders in accordance with the requirements
of Section 16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all
the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and State of New York, on the 27th day
of January 1997.
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
Registrant
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Signature: Title: Date:
/s/Heath B. McLendon Chairman of the Board 1/27/97
Heath B. McLendon (Chief Executive Officer)
/s/Lewis E. Daidone Senior Vice President 1/27/97
Lewis E. Daidone and Treasurer
(Chief Financial and
Accounting Officer)
/s/Lloyd J. Andrews* Director 1/27/97
Lloyd J. Andrews
/s/Robert M. Frayn* Director 1/27/97
Robert M. Frayn
/s/Leon P. Gardner* Director 1/27/97
Leon P. Gardner
/s/Howard J. Johnson* Director 1/27/97
Howard J. Johnson
/s/David E. Maryatt* Director 1/27/97
David E. Maryatt
/s/ Frederick O. Paulsell* Director 1/27/97
Frederick O. Paulsell
/s/Jerry A. Viscione* Director 1/27/97
Jerry A. Viscione
/s/Julie W. Weston* Director 1/27/97
Julie W. Weston
* Signed pursuant to power of attorney filed May 26, 1995, as an exhibit
to Post-Effective Amendment No. 27.
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 29 to Registration
Statement
No. 2-71469 of Smith Barney Fundamental Value Fund, Inc. of our report dated
November 1, 1996, incorporated by reference in the Statement of Additional
Information, which is a part of such Registration Statement, and to the
references to us under the headings Financial Highlights" in the Prospectus,
which is a part of such Registration Statement, and Counsel and Auditors" in
the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
January 24, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY FUNDAMENTAL VALUE FUND INC. CLASS A
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<NAME> SMITH BARNEY FUNDAMENTAL VALUE FUND INC. CLASS B
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<PERIOD-END> SEP-30-1996
[INVESTMENTS-AT-COST] 805,421,789
[INVESTMENTS-AT-VALUE] 981,417,153
[RECEIVABLES] 10,705,450
[ASSETS-OTHER] 635
[OTHER-ITEMS-ASSETS] 267,837,000
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[PAYABLE-FOR-SECURITIES] 5,657,800
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[SHARES-COMMON-STOCK] 76,009,204
[SHARES-COMMON-PRIOR] 62,452,558
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[ACCUM-APPREC-OR-DEPREC] 176,655,866
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[EXPENSES-NET] 18,014,119
[NET-INVESTMENT-INCOME] 14,687,764
[REALIZED-GAINS-CURRENT] 74,028,199
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[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 8,665,974
[DISTRIBUTIONS-OF-GAINS] 23,794,789
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 21,765,620
[NUMBER-OF-SHARES-REDEEMED] 11,904,915
[SHARES-REINVESTED] 3,695,941
[NET-CHANGE-IN-ASSETS] 304,070,605
[ACCUMULATED-NII-PRIOR] 11,394,177
[ACCUMULATED-GAINS-PRIOR] 29,644,168
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[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 7,119,074
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 18,014,119
[AVERAGE-NET-ASSETS] 622,909,028
[PER-SHARE-NAV-BEGIN] 8.62
[PER-SHARE-NII] 0.13
[PER-SHARE-GAIN-APPREC] 1.01
[PER-SHARE-DIVIDEND] 0.13
[PER-SHARE-DISTRIBUTIONS] 0.37
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.26
[EXPENSE-RATIO] 2.09
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
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<NAME> SMITH BARNEY FUNDAMENTAL VALUE FUND INC. CLASS C
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[INVESTMENTS-AT-COST] 805,421,789
[INVESTMENTS-AT-VALUE] 981,417,153
[RECEIVABLES] 10,705,450
[ASSETS-OTHER] 635
[OTHER-ITEMS-ASSETS] 267,837,000
[TOTAL-ASSETS] 1,259,960,238
[PAYABLE-FOR-SECURITIES] 5,657,800
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[OTHER-ITEMS-LIABILITIES] 3,362,733
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[PAID-IN-CAPITAL-COMMON] 1,003,838,553
[SHARES-COMMON-STOCK] 4,811,659
[SHARES-COMMON-PRIOR] 2,529,245
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[ACCUMULATED-NET-GAINS] 56,562,900
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[ACCUM-APPREC-OR-DEPREC] 176,655,866
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[DIVIDEND-INCOME] 20,937,033
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[EXPENSES-NET] 18,014,119
[NET-INVESTMENT-INCOME] 14,687,764
[REALIZED-GAINS-CURRENT] 74,028,199
[APPREC-INCREASE-CURRENT] 52,597,728
[NET-CHANGE-FROM-OPS] 141,313,691
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 402,226
[DISTRIBUTIONS-OF-GAINS] 1,059,573
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[NUMBER-OF-SHARES-SOLD] 2,925,320
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[SHARES-REINVESTED] 168,804
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