As filed with the Securities and Exchange Commission on June 23, 1994
Registration
No. 2-74288 811-3275
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. 36 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended X
Amendment No. 38 X
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.
(Exact name of Registrant as Specified in Charter)
Two World Trade Center, New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 720-9218
Christina T. Sydor
Secretary
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.
Exchange Place
Boston, Massachusetts 02109
(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:
immediately upon filing pursuant to Rule 485(b)
on ____________ pursuant to Rule 485(b)
X 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 ending
December 31, 1993 was filed on February 28, 1994.
<PAGE>
JUNE 24, 1994
SMITH BARNEY SHEARSON
EUROPEAN
FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------------------------------------
PROSPECTUS June 24,
1994
Two World Trade Center
New York, New York 10048
(212) 720-9218
Smith Barney Shearson European Fund (the "Fund") has an investment objective
of long-term capital appreciation by investing primarily in securities of
issuers based in countries of Europe, including Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, The
Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey and
the United Kingdom. The decision to invest in the Fund's shares requires
consideration of certain factors that are not normally involved in an
investment
in U.S. securities.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Shearson Investment Funds Inc.
(the "Company"). The Company is an open-end management investment company
commonly referred to as a mutual fund.
This Prospectus briefly sets forth certain information about the Company and
the Fund, including sales charges, distribution and service fees and expenses
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and to retain it
for
future reference. Shares of other funds offered by the Company are described
in
separate Prospectuses that may be obtained by calling the Company at the
telephone number set forth above or by contacting any Smith Barney Financial
Consultant. The net asset value per share of the Fund will fluctuate in
response
to changes in market conditions and other factors.
Additional information about the Company and the Fund is contained in a
Statement of Additional Information dated June 24, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Company at the telephone number or address
set
forth above or by contacting any Smith Barney Financial Consultant. The
Statement of Additional Information 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 ADVISERS, INC.
Investment Adviser and Administrator
THE BOSTON COMPANY ADVISORS, INC.
Sub-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>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary 3
-------------------------------------------------------------------
Financial Highlights 9
-------------------------------------------------------------------
Variable Pricing System 12
-------------------------------------------------------------------
Investment Objective and Management Policies 13
-------------------------------------------------------------------
Management of the Company and the Fund 21
-------------------------------------------------------------------
Purchase of Shares 23
-------------------------------------------------------------------
Redemption of Shares 30
-------------------------------------------------------------------
Valuation of Shares 34
-------------------------------------------------------------------
Exchange Privilege 36
-------------------------------------------------------------------
Distributor 42
-------------------------------------------------------------------
Dividends, Distributions and Taxes 44
-------------------------------------------------------------------
The Fund's Performance 47
-------------------------------------------------------------------
Additional Information 49
-------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------------------------------------
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
PROSPECTUS.
SEE THE "TABLE OF CONTENTS."
BENEFITS TO INVESTORS THE FUND OFFERS INVESTORS SEVERAL IMPORTANT BENEFITS:
- - Investment liquidity through convenient purchase and redemption procedures.
- - A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
- - Different methods for purchasing shares that allow investment flexibility
and
a wider range of investment alternatives.
- - An automatic dividend reinvestment feature, plus an exchange privilege
within
the same class of shares of the other funds in the Company and of most
other
funds in the Smith Barney Shearson Group of Funds.
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks long-term capital appreciation by investing in issuers
based
in countries of Europe, including Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Luxembourg, The Netherlands, Norway,
Poland, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom.
Under normal circumstances, the Fund will invest at least 65% of its assets in
a
diversified portfolio of equity securities of issuers domiciled in the above
named countries. See "Investment Objective and Management Policies."
VARIABLE PRICING SYSTEM 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 two
classes
of shares, Class A shares and Class B shares, which differ principally in
terms
of the sales charges and rates of expenses to which they are subject. In
addition, a third class -- Class D shares -- is offered only to plans
participating in the Smith Barney 401(k) Program (the "401(k) Program"). See
"Variable Pricing System" and "Purchase of Shares -- Smith Barney 401(k)
Program."
3
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
CLASS A SHARES These shares are offered at net asset value per share plus a
maximum initial sales charge of 5.00%. The Fund pays an annual service fee of
0.25% of the value of average daily net assets of this Class. See "Purchase of
Shares."
CLASS B SHARES These shares are offered at net asset value per share subject
to
a maximum contingent deferred sales charge ("CDSC") of 5.00% of redemption
proceeds, declining by 1.0% each year after the date of purchase to zero. The
Fund pays an annual service fee of 0.25% and an annual distribution fee of
0.75%
of the value of average daily net assets of this Class. See "Purchase of
Shares."
CLASS B CONVERSION FEATURE Class B shares will convert automatically to Class
A
shares, based on relative net asset value, approximately eight years after the
date of original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. The first of these conversions will
commence on or about September 30, 1994. See "Variable Pricing System -- Class
B
Shares."
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
401(k) Program, which is generally designed to assist employers or 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 and employer
sponsored non-qualified employee benefit plans (collectively, "Participating
Plans"). Class A, Class B and Class D shares are available as investment
alternatives for Participating Plans. Class A and Class B shares acquired
through the 401(k) Program are subject to the same service and/or distribution
fees as, but different sales charges and CDSC schedules than, the Class A and
Class B shares acquired by other investors. Class D shares acquired by
Participating Plans are offered at net asset value per share without any sales
charges or CDSC. The Fund pays annual service and distribution fees based on
the
value of average daily net assets attributable to this Class. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Company's distributor,
Smith Barney Inc. ("Smith Barney"). Shares may also be purchased through a
broker that clears securities transactions through Smith Barney on a fully
disclosed basis (an "Introducing Broker"). Direct purchases
4
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
of certain retirement plans may be made through The Shareholder Services
Group,
Inc. ("TSSG"), the Company's transfer agent, a subsidiary of First Data
Corporation ("FDC"). Smith Barney recommends that, in most cases, single
investments of $250,000 or more should be made in Class A shares. See
"Purchase
of Shares."
INVESTMENT MINIMUMS Investors are subject to a minimum initial investment
requirement of $1,000 and a minimum subsequent investment requirement of $200.
However, for Individual Retirement Accounts ("IRAs") and Self-Employed
Retirement Plans, the minimum initial investment requirement is $250 and the
minimum subsequent investment requirement is $100 and for certain qualified
retirement plans, the minimum initial and subsequent investment requirement is
$25. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund also 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 in an amount not less
than
$100. 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. Class A and Class D shares are
redeemable at net asset value and Class B shares are redeemable at net asset
value less any applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND Smith, Barney Advisers, Inc. ("Smith Barney Advisers")
serves as the Fund's investment adviser and administrator. Smith Barney
Advisers
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), a
full-line investment firm serving U.S. and foreign securities and commodities
markets. Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company principally
engaged in the business of providing investment, consumer finance and
insurance
services. As of April 30, 1994, Smith Barney Advisers had aggregate assets
under
management in excess of $8.9 billion.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
sub-administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), a financial services holding company which in turn is
an
indirect wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). As of
April 30, 1993, Boston Advisors provided
5
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
investment management, investment advisory, and/or administrative services to
investment companies which had aggregate assets under management in excess of
$91.9 billion. See "Management of the Company and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of most other funds in the Smith Barney Shearson Group of Funds and
certain money market funds. Certain exchanges may be subject to a sales charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of each Class is quoted daily in the
financial section of most newspapers and is also available from any Smith
Barney
Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends and distributions are paid at least
annually from net investment income and net realized long- and short-term
capital gains. See "Dividends, Distributions and Taxes" and "Variable Pricing
System."
REINVESTMENT OF DIVIDENDS Unless otherwise specified by an investor, dividends
and distributions paid on shares of a Class will be reinvested automatically
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
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes" and "Variable Pricing
System."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after
a
short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The
foreign
securities in which the Fund invests may be subject to certain risks in
addition
to those inherent in domestic investments. The Fund may employ investment
techniques which involve certain other risks, including entering into
repurchase
agreements, lending portfolio securities and selling securities short. See
"Investment Objective and Management Policies -- Additional Investments."
6
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund based upon the maximum sales charge and the maximum CDSC that may be
incurred at the time of purchase or redemption and an estimate of the Fund's
current operating expenses:
<TABLE>
<CAPTION>
CLASS A CLASS B
CLASS D
<S> <C> <C>
<C>
-----------------------------------------------------------------------------
- --------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% --
- --
Maximum CDSC (as a percentage of redemption
proceeds) -- 5.00%
- --
-----------------------------------------------------------------------------
- --------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.90 0.90
0.90%
12b-1 fees* 0.25 1.00
1.00
Other expenses** 1.17 1.15
1.09
-----------------------------------------------------------------------------
- --------
TOTAL FUND OPERATING EXPENSES 2.32% 3.05%
2.99%
-----------------------------------------------------------------------------
- --------
<FN>
*Upon conversion of Class B shares to Class A shares, such shares will no
longer be
subject to a distribution fee. Class D shares do not have a conversion
feature and,
therefore, are subject to an ongoing distribution fee.
**All expenses are based on data for the Fund's fiscal year ended December
31, 1993.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges
imposed upon purchases or redemptions of Fund shares and investors may pay
actual charges less than 5.00%, depending on the amount purchased and, in the
case of Class B shares, the length of time the shares are held and whether the
shares are held through the 401(k) Program. See "Purchase of Shares" and
"Redemption of Shares." Management fees payable by the Fund include investment
advisory fees paid to Smith Barney Advisers at the annual rate of 0.70% of the
value of the Fund's average daily net assets and administration fees of 0.20%
of
the value of the Fund's average daily net assets. The nature of the services
for
which the Fund pays management fees is described under "Management of the
Company and the Fund." Smith Barney receives an annual Rule 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 shares and Class D shares, an annual
Rule
12b-1 fee of 1.00% of the value of average daily net assets of Class B
7
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
shares and Class D shares, respectively, 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 accounting fees, printing
costs
and registration fees.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to
a hypothetical $1,000 investment in the Fund assuming a 5.0% annual total
return. THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE
LEVELS SET FORTH IN THE ABOVE TABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
OR
LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5.0% ANNUAL
RETURN,
THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5.0%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10
YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
- ---
Class A shares:** $72 $119 $168
$303
Class B shares:
Assumes complete redemption at the
end of each time period *** 81 124 170
319
Assumes no redemption 31 94 160
319
Class D shares: 26 81 136
292
-----------------------------------------------------------------------------
- ---
<FN>
*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.
**Assumes deduction at the time of purchase of the maximum 5.00% sales
charge.
***Assumes deduction at the time redemption of the maximum CDSC applicable
for that
time period.
</TABLE>
8
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL REPORT DATED
DECEMBER 31, 1993. THE INFORMATION BELOW SHOULD BE READ IN CONJUNCTION WITH
THE
FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL
REPORT DATED DECEMBER 31, 1993, WHICH IS INCORPORATED BY REFERENCE INTO THE
STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
12/31/93## 12/31/92*
<S> <C>
<C>
Net Asset Value, beginning of period $11.72
$11.52
- ------------------------------------------------------------------------------
- -------
Income from investment operations:
Net investment income/(loss) 0.07
0.00++
Net realized and unrealized gain on investments 2.68
0.20
- ------------------------------------------------------------------------------
- -------
Total from investment operations 2.75
0.20
- ------------------------------------------------------------------------------
- -------
Net Asset Value, end of period $14.47
$11.72
- ------------------------------------------------------------------------------
- -------
Total return+ 23.46%
1.74%
- ------------------------------------------------------------------------------
- -------
Ratios to average net assets/ supplemental data:
Net assets, end of period (in 000's) $1,707
$ 46
Ratio of operating expenses to average net assets 2.32%
1.87%**
Ratio of net investment income/(loss) to average net assets 0.48%
(0.04)%**
Portfolio turnover rate 68%
108%
- ------------------------------------------------------------------------------
- -------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and
does not
reflect any applicable sales charges. During these periods, the Fund was
advised by another
investment adviser.
++Amount represents less than (0.01).
##Per share amounts have been calculated using the monthly average share
method.
</TABLE>
9
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.**
<TABLE>
<CAPTION>
YEAR YEAR
ENDED
ENDED
12/31/93##
12/31/92
<S> <C> <C>
Net Asset Value, beginning of year $ 11.72 $
12.80
- ------------------------------------------------------------------------------
- ---
Income from investment operations:
Net investment income/(loss) (0.03)
(0.12)
Net realized and unrealized gain/(loss) on
investments 2.71
(0.96)
- ------------------------------------------------------------------------------
- ---
Total from investment operations 2.68
(1.08)
Distributions to shareholders:
Distributions from net investment income -- --
Distributions from net realized gains -- --
Distributions from capital -- --
- ------------------------------------------------------------------------------
- ---
Total distributions -- --
- ------------------------------------------------------------------------------
- ---
Net Asset Value, end of year $ 14.40 $
11.72
- ------------------------------------------------------------------------------
- ---
Total return+ 22.87%
(8.44)%
- ------------------------------------------------------------------------------
- ---
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $35,698
$23,120
Ratio of operating expenses to average net assets 3.05%
2.68%
Ratio of net investment income/(loss) to average net
assets (0.25)%
(0.85)%
Portfolio turnover rate 68%
108%
- ------------------------------------------------------------------------------
- ---
<FN>
*The Fund commenced operations on November 6, 1987.
**Shares in existence prior to November 6, 1992 have been designated Class B
shares.
***Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges. During these periods, the
Fund
was advised by another investment adviser.
++Anualized expense ratios before waiver of fees and reimbursement of
expenses
by investment adviser, sub-investment adviser and administrator for the
years
ended December 31, 1989 and 1988 and the period ended December 31, 1987
were
8.33%, 9.11% and 18.07%, respectively.
+++Not covered by Coopers & Lybrand's report.
#Net investment income/loss before waiver of fees and reimbursement of
expenses
by the investment adviser, sub-investment adviser and administrator for the
years ended December 31, 1989 and 1988 and the period ended December 31,
1987
were $1.00, $0.58 and $0.09, respectively.
##Per share amounts have been calculated using the monthly average share
method.
</TABLE>
AS OF DECEMBER 31, 1993, NO COMPARABLE FINANCIAL INFORMATION WAS AVAILABLE FOR
THE FUND'S CLASS D SHARES.
10
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/91 12/31/90 12/31/89 12/31/88+++
12/31/87*+++
<S> <C> <C> <C> <C>
$ 12.97 $ 13.29 $11.32 $10.44 $10.00
- ------------------------------------------------------------------------------
- ---
0.19 0.24 0.14# (0.06)# 0.05#
(0.08) (0.09) 2.38 1.33 0.39
- ------------------------------------------------------------------------------
- ---
0.11 0.15 2.52 1.27 0.44
(0.27) (0.16) (0.05) (0.12) --
-- (0.31) (0.48) (0.27) --
(0.01) -- (0.02) -- --
- ------------------------------------------------------------------------------
- ---
(0.28) (0.47) (0.55) (0.39) --
- ------------------------------------------------------------------------------
- ---
$ 12.80 $ 12.97 $13.29 $11.32 $10.44
- ------------------------------------------------------------------------------
- ---
0.88% 1.17% 22.26% 12.28% 4.40%
- ------------------------------------------------------------------------------
- ---
$28,634 $28,017 $7,445 $2,287 $1,708
2.55% 2.92% 2.37%++ 2.51%++
4.30%***++
1.49% 2.21% 0.97% (0.71)%
4.73%***
94% 118% 109% 105% 167%
- ------------------------------------------------------------------------------
- ---
</TABLE>
11
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------
VARIABLE PRICING SYSTEM
The Smith Barney Shearson Group of Funds offers individual investors two
methods of purchasing shares, thus enabling investors to choose the Class that
best suits their needs, given the amount of purchase and intended length of
investment. A third class -- Class D -- is offered only to Participating
Plans.
CLASS A SHARES. Class A shares are sold at net asset value per share plus a
maximum initial sales charge of 5.0% imposed at the time of purchase. The
initial sales charge may be reduced or waived for certain purchases. Class A
shares are subject to an annual service fee of 0.25% of the value of the
Fund's
average daily net assets attributable to the Class. The annual service fee is
used by Smith Barney to compensate its Financial Consultants for ongoing
services provided to shareholders. The sales charge is used to compensate
Smith
Barney for expenses incurred in selling Class A shares. See "Purchase of
Shares."
CLASS B SHARES. Class B shares are sold at net asset value per share subject
to a maximum 5.0% CDSC, which is assessed only if the shareholder redeems
shares
within the first five years of investment. This results in 100% of the
investor's assets being used to acquire shares of the Fund. For each year of
investment within the five-year time frame, the applicable CDSC declines by
1.0%; in year six, the applicable CDSC is reduced to 0%. See "Purchase of
Shares" and "Redemption of Shares."
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the value of the Fund's average daily net assets
attributable to the Class. Like the service fee applicable to Class A shares,
the Class B service fee is used to compensate Smith Barney Financial
Consultants
for ongoing services provided to shareholders. Additionally, the distribution
fee paid with respect to Class B shares compensates Smith Barney for expenses
incurred in selling those shares, including expenses such as sales
commissions,
Smith Barney's branch office overhead expenses and marketing costs associated
with Class B shares, such as preparation of sales literature, advertising and
printing and distributing prospectuses, statements of additional information
and
other materials to prospective investors in Class B shares. A Financial
Consultant may receive different levels of compensation for selling different
Classes. Class B shares are subject to a distribution fee and are subject to
higher transfer agency fees than Class A shares which generally will cause
Class
B shares to have a higher expense ratio and pay lower dividends than Class A
shares.
12
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------------------------------------
VARIABLE PRICING SYSTEM (CONTINUED)
Eight years after the date of purchase, Class B shares will convert
automatically to Class A shares, based on the relative net asset values of
shares of each Class, and will no longer be subject to a distribution fee. In
addition, a certain portion of Class B shares that have been acquired through
the reinvestment of dividends and distributions ("Class B Dividend Shares")
will
be converted at that time. That portion will be a percentage of the total
number
of outstanding Class B Dividend Shares, which percentage will be determined by
the ratio of the total number of Class B shares converting at the time to the
total number of outstanding Class B shares (other than Class B Dividend
Shares).
The first of these conversions will commence on or about September 30, 1994.
The
conversion of Class B shares into Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that such conversions will
not constitute taxable events for federal tax purposes.
CLASS D SHARES. Class D shares of the Fund are sold to Participating Plans
at
net asset value per share and are not subject to an initial sales charge or
CDSC. This Class of shares is subject to an annual service fee of 0.25% and an
annual distribution fee of 0.75% of the value of the Fund's average daily net
assets attributable to the Class. The distribution fee is used by Smith Barney
for expenses incurred in selling Class D shares, and the service fee is used
to
compensate Smith Barney Financial Consultants for ongoing services provided to
Class D shareholders. Class D shares are subject to a distribution fee which
will cause Class D shares to have a higher expense ratio and to pay lower
dividends than Class A shares.
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set forth below is a description of the investment objective and policies of
the Fund. There can be no assurance that the Fund will achieve its investment
objective. Certain instruments and techniques discussed in this summary are
described in greater detail in this Prospectus under "Additional Investments"
and in the Statement of Additional Information.
The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions and the
Fund's investment objective are fundamental policies, which means that they
13
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may not be changed without a majority vote of shareholders of the Fund. Except
for the objective and those restrictions specifically identified as
fundamental,
all investment policies and practices described in this Prospectus and in the
Statement of Additional Information are non-fundamental, so that the Board of
Directors may change them without shareholder approval. The fundamental
restrictions applicable to the Fund include a prohibition on (a) purchasing a
security if, as a result, more than 5% of the assets of the Fund would be
invested in the securities of the issuer (with certain exceptions) or the Fund
would own more than 10% of the outstanding voting securities of the issuer,
(b)
investing more than 10% of the Fund's total assets in "illiquid" securities
(which includes repurchase agreements with more than seven days to maturity),
and (c) investing more than 25% of the Fund's total assets in the securities
of
issuers in a particular industry (with exceptions for U.S. government
securities
and certain money market instruments).
The Fund has an investment objective of achieving long-term capital
appreciation. The Fund seeks to achieve its objective by investing primarily
in
equity securities (common and preferred stock) of issuers in countries of
Europe, including Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Luxembourg, The Netherlands, Norway, Poland,
Portugal,
Spain, Sweden, Switzerland, Turkey and the United Kingdom ("Primary Investment
Area"). Smith Barney Advisers, the Fund's investment adviser, believes that
the
Fund's objective can best be achieved by an investment policy based on the
identification of countries and industries with above-average growth rates,
the
assessment of currency factors, and the identification of companies in those
countries and industries with potential for above-average growth in earnings.
It
is a fundamental policy of the Fund to invest, under normal circumstances, at
least 65% of its total assets in a diversified portfolio of equity securities
of
issuers domiciled in the Primary Investment Area of the Fund.
In addition, the Fund may invest in other kinds of securities, E.G.,
convertible bonds, warrants, Samurai and Yankee bonds, Eurobonds, American
Depositary Receipts, which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer ("ADRs") and European Depositary Receipts, which are receipts
similar to ADRs issued and traded in Europe ("EDRs"), securities issued by
companies domiciled outside the Primary Investment
14
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Area of the Fund, including, but not limited to, Eastern Europe, U.S. and
foreign government securities, and U.S. and non-U.S. money market securities.
Money market securities will generally be held by the Fund for temporary and
defensive purposes. With respect to certain countries, investments by the Fund
presently may only be made by acquiring shares of other investment companies
with local governmental authority to invest in those countries. It is not
expected that the income yield of the Fund will be significant.
The Fund also may hold cash in U.S. dollars to meet redemption requests and
other expenses and cash in other currencies to meet settlement requirements
for
foreign securities. The Fund may engage in currency exchange transactions in
order to protect against uncertainty in the level of future exchange rates
between a particular foreign currency and the U.S. dollar or between foreign
currencies in which the Fund's securities are or may be denominated. The Fund
may conduct its currency exchange transactions either on a "spot" (I.E., cash)
basis at the rate prevailing in the currency exchange market or through
entering
into forward contracts to purchase or sell currencies. The Fund's dealings in
forward foreign currency exchange contracts will be limited to hedging
involving
either specific transactions or aggregate portfolio positions. See "Foreign
Securities and American Depositary Receipts" and "Foreign Currency Risks"
herein
and see the Statement of Additional Information for further details concerning
these transactions.
The Fund may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers. Such bonds are commonly called "Samurai bonds" and correspond to
"Yankee bonds" or dollar-denominated bonds sold in the United States by non-
U.S.
issuers. As compared with domestic issues, E.G., those of the government of
Japan and its agencies, Samurai bond issues normally carry a higher interest
rate but are less actively traded and therefore may be volatile. Moreover, as
with other securities denominated in foreign currencies, their value is
affected
by fluctuations in currency exchange rates. It is the policy of the Fund to
invest in Samurai bond issues only after taking into account considerations of
quality and liquidity, as well as yield. These bonds would be of Organization
for Economic Cooperation and Development ("OECD") governments or would have
AAA
ratings.
15
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may borrow money from a bank as a temporary measure for emergency
or
extraordinary purposes in an amount not exceeding 10% of the value of its
total
assets, and may invest no more than 10% of its total assets in securities that
are not readily marketable (I.E., trading in the security is suspended or, in
the case of unlisted securities, market makers do not exist or will not
entertain bids or offers). When the Fund has borrowed in excess of 5% of the
value of its total assets, the Fund will not make further investments. The
Fund
will not invest more than 25% of the value of its total assets in the
securities
of issuers engaged in any one industry (other than the U.S. government, its
agencies and instrumentalities). The Fund will invest no more than 10% of the
value of its net assets in warrants valued at the lower of cost or market. The
Fund does not currently intend to engage in trading of options or futures
contracts but may do so in the future if determined to be in the Fund's best
interests by the Fund's Board of Directors.
In making purchases of securities consistent with the above policies, the
Fund
will be subject to the applicable restrictions referred to under "Investment
Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
U.S. GOVERNMENT SECURITIES. U.S. government securities are obligations of,
or
are guaranteed by, the U.S. government, its agencies or instrumentalities.
These
include bills, certificates of indebtedness, and notes and bonds issued by the
U.S. Treasury or by agencies or instrumentalities of the U.S. government. Some
U.S. government securities, such as U.S. Treasury bills and bonds, are
supported
by the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association and the
Federal
Home Loan Mortgage Corporation ("FHLMC"), are supported only by the credit of
the instrumentality. Mortgage participation certificates issued by the FHLMC
generally represent ownership interests in a pool of fixed-rate conventional
mortgages. Timely payment of principal and interest on these certificates is
guaranteed solely by the issuer of the certificates. Other
16
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
investments will include Government National Mortgage Association Certificates
("GNMA Certificates"), which are mortgage-backed securities representing part
ownership of a pool of mortgage loans on which timely payment of interest and
principal is guaranteed by the full faith and credit of the U.S. government.
While the U.S. government guarantees the payment of principal and interest on
GNMA Certificates, the market value of the securities is not guaranteed and
will
fluctuate.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreement
transactions on U.S. government securities with certain member banks of the
Federal Reserve System having assets in excess of $100 million and with
certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more
than
one week) subject to an obligation of the seller to repurchase, and the Fund
to
resell, the obligation at an agreed-upon price and time, thereby determining
the
yield during the Fund's holding period. This arrangement results in a fixed
rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
The
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented
from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during
the
period while the Fund seeks to assert these rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of
losing
all or part of the income from the agreement. The Fund's investment adviser
and
administrator, acting under the supervision of the Board of Directors, review
on
an ongoing basis the creditworthiness and the value of the collateral of those
banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of
U.S.
government securities or cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and
obtain
the return of the securities loaned; (c) the Fund will receive any
17
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
interest or dividends paid on the loaned securities; and (d) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Fund.
SHORT SALES. The Fund may sell securities "short against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable
without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
FOREIGN SECURITIES AND AMERICAN DEPOSITARY RECEIPTS. The Fund may purchase
foreign securities and ADRs. ADRs are publicly traded on exchanges or
over-the-counter in the United States. The Fund also may purchase EDRs and may
invest directly in securities of foreign companies which are held and traded
abroad.
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, dividends payable on foreign
securities may be subject to foreign withholding and other taxes withheld
prior
to distribution. Foreign securities often trade with less frequency and volume
than domestic securities and therefore may exhibit greater price volatility,
and
changes in foreign exchange rates will affect the value of those securities
which are denominated or quoted in currencies other than the U.S. dollar. Many
of the foreign securities held by the Fund will not be registered with, nor
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 United States economy in such
respects
as growth of Gross National Product, rate of inflation, capital reinvestment,
resource self-
18
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
The Fund will calculate its net asset value and complete orders to purchase,
exchange or redeem shares only on a Monday through Friday basis excluding
holidays on which the NYSE is closed. The Fund's securities are primarily
listed
on foreign stock exchanges which may trade on other days (such as a Saturday).
As a result, the net asset value of the Fund's shares may be significantly
affected by such trading on days when a shareholder has no access to the Fund.
FOREIGN CURRENCY RISKS. The Fund will invest primarily in securities
denominated in currencies other than the U.S. dollar, and since the Fund may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, it may be affected favorably or unfavorably
by exchange control regulations or changes in the exchange rates between such
currencies and the dollar. Changes in foreign currency exchange rates will
influence values within the Fund from the perspective of U.S. investors, and
may
also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if
any,
to be distributed to shareholders by the Fund. The rate of exchange between
the
U.S. dollar and other currencies is determined by the forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors.
The Fund may enter into forward foreign currency exchange contracts in order
to protect against uncertainty in the level of future foreign exchange rates
between a particular foreign currency and the U.S. dollar or between foreign
currencies in which the Fund's securities are or may be denominated. A forward
foreign currency exchange contract involves an obligation to purchase or sell
a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the
time
of the contract. The Fund also may utilize forward currency contracts
denominated in the European Currency Unit to hedge portfolio security
positions
when a security or securities are denominated in
19
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
currencies of member countries in the European Monetary System. Forward
foreign
currency exchange contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Forward foreign currency exchange contracts may be bought or sold
to
protect the Fund against a possible loss resulting from an adverse change in
the
relationship between foreign currencies and the U.S. dollar or between foreign
currencies. Although such contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of such
currency increase. In addition, the Fund could be exposed to risks of loss or
delay in fulfilling the terms of the contracts if the counterparties to the
contracts are unable to meet the terms of their contracts.
RESTRICTED SECURITIES. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual
restrictions on their resale. Such restrictions might prevent the sale of
restricted securities at a time when such a sale would otherwise be desirable.
Restricted securities and securities for which there is no readily available
market ("illiquid assets") will not be acquired if such acquisition would
cause
the aggregate value of illiquid assets and restricted securities to exceed 10%
of the Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
Smith Barney Advisers arranges for the purchase and sale of the Fund's
securities and selects broker-dealers which, in its best judgment, provide
prompt and reliable execution at favorable prices and reasonable commission
rates. Smith Barney Advisers may select broker-dealers which provide it with
research services and may cause the Fund to pay such broker-dealers
commissions
which exceed those other broker-dealers may have charged, if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services. Smith Barney and its affiliates may serve as a regular
broker
for the Fund in effecting portfolio transactions on a national securities or
commodities exchange, and may retain commissions, in accordance with certain
regulations of the SEC.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
fiscal
20
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
year by the monthly average of the value of the Fund's securities, with money
market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year.
The Fund will not normally engage in the trading of securities for the
purpose
of realizing short-term profits, but will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions, and
portfolio
turnover will not be a limiting factor should Smith Barney Advisers deem it
advisable to purchase or sell securities. While it is not possible to predict
future market conditions or portfolio turnover rates with any certainty, Smith
Barney Advisers anticipates that, under normal market conditions, the annual
portfolio turnover rate for the Fund may exceed 100%. Any portfolio turnover
rate in excess of 100% generally would exceed that of most other mutual funds,
including other funds with the investment objective of capital appreciation.
The
Fund's portfolio turnover rates for each of the past fiscal years are set
forth
under "Financial Highlights."
Increased portfolio turnover may result in greater brokerage commissions and
in realization of net short-term capital gains which, when distributed, are
taxed to shareholders (other than retirement plans) at ordinary income tax
rates.
- --------------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment adviser
and administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser
and administrator and the sub-administrator. The Statement of Additional
Information contains general and background information regarding each
Director
and executive officer of the Company.
21
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
INVESTMENT ADVISER AND ADMINISTRATOR -- SMITH BARNEY ADVISERS
Smith Barney Advisers, located at 1345 Avenue of the Americas, New York, New
York 10022, serves as the Fund's investment adviser and administrator. Smith
Barney Advisers has been in the investment counseling business since 1968 and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management of $8.9
billion as of April 30, 1994.
Subject to the supervision and direction of the Fund's Board of Directors,
Smith Barney Advisers manages the Fund's portfolio in accordance with the
Fund's
stated investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs professional
portfolio managers and securities analysts who provide research services to
the
Fund. Smith Barney Advisers receives an investment advisory fee computed daily
and paid monthly at the annual rate of 0.70% of the value of the average daily
net assets of the Fund. The investment advisory fees of the Fund are higher
than
investment advisory fees of most other mutual funds that invest in domestic
securities, since the costs associated with managing foreign securities are
generally higher than those usually incurred in managing domestic securities.
As the Fund's administrator, Smith Barney Advisers oversees all aspects of
the
Fund's administration and operations. Pursuant to an administration agreement
with the Fund, Smith Barney Advisers is paid a fee at the annual rate of 0.20%
of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Jeffrey L. Russell of Smith Barney Advisers has served as the Investment
Officer of the Fund since April 8, 1994, and is primarily responsible for the
day-to-day investment operations of the Fund, including the making of
investment
decisions. Mr. Russell joined Smith Barney Advisers in February 1990 and is a
Managing Director and Senior International Equity Portfolio Manager. Prior to
that time, Mr. Russell was a Media Analyst and International Portfolio Manager
with Drexel Burnham Lambert. Erich Stock of LBGAM served as the Investment
Officer of the Fund until April 8, 1994.
22
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
A management discussion and analysis of the Fund's performance during the
fiscal year ended December 31, 1993 (including a line graph comparing the
Fund's
performance to the Morgan Stanley Capital International European Index) is
included in the Fund's Annual Report to Shareholders dated December 31, 1993.
The Fund's Annual Report may be obtained upon request and without charge from
any Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page 1 of this prospectus.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors is an indirect wholly
owned subsidiary of Mellon. Boston Advisors provides investment management,
investment advisory, and/or administrative services to investment companies
which had aggregate assets under management as of April 30, 1994, in excess of
$91.9 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
For
its services, Boston Advisors is paid a fee by Smith Barney Advisers. The Fund
does not pay any fee directly to Boston Advisors. For the fiscal year ended
December 31, 1993, Boston Advisors was paid .20% of the value of average daily
net assets in sub-investment advisory and/or administration fees.
- --------------------------------------------------------------------
PURCHASE OF SHARES
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney or with an Introducing Broker, except that investors
purchasing shares of the Fund through a qualified retirement plan may do so
directly through the Company's transfer agent. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B or,
in
the case of Participating Plans, Class D shares. No maintenance fee will be
charged in connection with a brokerage account through which an investor
purchases or holds shares. Purchases are effected at the public offering price
next determined after a purchase order is
23
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
received by Smith Barney or an Introducing Broker (the "trade date"). Payment
generally is due to Smith Barney or an Introducing Broker on the fifth
business
day (the "settlement date") after the order is placed. Investors who make
payment prior to the settlement date may permit the payment to be held in
their
brokerage accounts or may designate a temporary investment (such as a money
market fund in the Smith Barney Shearson Group of Funds) for such payment
until
the settlement date. The Company reserves the right to reject any purchase
order
and to suspend the offering of shares for any period of time.
Purchase orders received by Smith Barney or the Introducing Broker prior to
the close of regular trading on the NYSE, currently 4:00 p.m., New York time,
on
any day the Fund's net asset value is calculated are priced according to the
net
asset value determined on that day. Purchase orders received after the close
of
regular trading on the NYSE are priced as of the time the net asset value per
share is next determined. See "Valuation of Shares."
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic
Investment Plan under which shareholders may authorize Smith Barney or an
Introducing Broker to place a purchase order each month or quarter for Fund
shares in an amount not less than $100. The purchase price is paid
automatically
from cash held in the shareholder's Smith Barney brokerage account or through
the automatic redemption of the shareholder's shares of a Smith Barney money
market fund. For further information regarding the Systematic Investment Plan,
shareholders should contact their Smith Barney Financial Consultants.
MINIMUM INVESTMENTS. The minimum initial investment in the Fund is $1,000
and
the minimum subsequent investment is $200 except that for purchases through
(a)
IRAs and Self-Employed Retirement Plans, the minimum initial and subsequent
investments are $250 and $100, respectively, (b) retirement plans qualified
under sections 401(a) and 403(b)(7) of the Code, the minimum and subsequent
investment is $25 and (c) the Fund's Systematic Investment Plan, the minimum
initial and subsequent investments are both $100. There are no minimum
requirements for employees of Travelers and its subsidiaries, including Smith
Barney. The Company reserves the right at any time to vary the initial and
subsequent investment minimums. Certificates for Fund shares are issued upon
request to the Company's transfer agent, TSSG.
24
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS A SHARES
The public offering price for Class A shares is the per share net asset
value
of that Class next determined after a purchase order is received plus a sales
charge, which is imposed in accordance with the following schedule:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE
AS %
AMOUNT OF INVESTMENT* OF OFFERING PRICE OF NET ASSET
VALUE
<S> <C> <C>
- ------------------------------------------------------------------------------
- --------
Less than $25,000 5.00% 5.26%
$25,000 but under $100,000 4.00% 4.17%
$100,000 but under $250,000 3.25% 3.36%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 2.00% 2.04%
$1,000,000 or more** 0.00% 0.00%
- ------------------------------------------------------------------------------
- -------
<FN>
*Smith Barney has adopted guidelines directing its Financial Consultants and
Introducing Brokers that single investments of $250,000 or more should be
made in
Class A shares.
**No sales charge is imposed on purchases of Class A shares of $1 million or
more;
however, a CDSC of 0.75% for the first year after purchase is imposed. The
CDSC on
Class A shares will be payable to Smith Barney which compensates Smith
Barney
Financial Consultants upon the sale of these shares. The CDSC will be waived
in the
same circumstances in which the CDSC applicable to Class B shares is waived.
See
"Redemption of Shares -- Contingent Deferred Sales Charge -- Class B Shares
- --
Waivers of CDSC."
</TABLE>
REDUCED SALES CHARGES -- CLASS A SHARES
Reduced sales charges are available to investors who are eligible to combine
their purchases of Fund shares to receive volume discounts. Investors eligible
to receive volume discounts include individuals and their immediate families,
tax-qualified employee benefit plans and trustees or other professional
fiduciaries (including a bank, or an investment adviser registered with the
SEC
under the Investment Advisers Act of 1940, as amended) purchasing shares for
one
or more trust estates or fiduciary accounts even though more than one
beneficiary is involved. The initial sales charge is also reduced to 1.00% for
Smith Barney Personal Living Trust program participants for whom Smith Barney
acts as trustee. Reduced sales charges on Class A shares are also available
under a combined right of accumulation, under which an investor may combine
the
value of Class A shares already held in the Fund, in any other fund in the
Company and in any of the other funds in the Smith Barney Shearson Group of
Funds listed below (except those sold without a sales charge), along with the
value of the Class A shares being purchased, to qualify for a reduced sales
charge. For example, if an investor owns Class A shares of the Fund, any other
funds in
25
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
the Company and other funds in the Smith Barney Shearson Group of Funds that
have an aggregate value of $22,000, and makes an additional investment in
Class
A shares of the Fund of $4,000, the sales charge applicable to the additional
investment would be 4.0%, rather than the 5.0% normally charged on a $4,000
purchase. Investors interested in further information regarding reduced sales
charges should contact their Smith Barney Financial Consultant.
Class A shares may be offered without any applicable sales charges to: (a)
employees of Travelers and its subsidiaries, including Smith Barney, and
employee benefit plans for such employees and their immediate families when
orders on their behalf are placed by such employees; (b) accounts managed by
registered investment advisory subsidiaries of Travelers; (c) directors,
trustees or general partners of any investment company for which Smith Barney
serves as distributor; (d) any other investment company in connection with the
combination of such company with the Fund by merger, acquisition of assets or
otherwise; (e) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of any other fund in the Company or of another fund in the
Smith
Barney Group of Funds that are sold with a maximum 5.0% sales charge) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 30 days of the redemption; and (f) 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 that the purchase is made with the proceeds of the
redemption of shares of a mutual fund that (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to a client by the Financial
Consultant, and (iii) when purchased, such shares were sold with a sales
charge
or are subject to a sales charge upon redemption.
CLASS B SHARES
The public offering price for Class B shares is the per share net asset
value
of that Class. No initial sales charge is imposed at the time of purchase. A
CDSC is imposed, however, on certain redemptions of Class B shares. See
"Redemptions of Shares" which describes the CDSC in greater detail.
26
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Smith Barney has adopted guidelines, in view of the relative sales charges
and
distribution fees applicable to the Classes, directing Smith Barney Financial
Consultants and Introducing Brokers that all purchases of shares of $250,000
or
more should be for Class A shares. Smith Barney reserves the right to vary
these
guidelines at any time.
SMITH BARNEY 401(K) PROGRAM
Shareholders investing in the Fund may be eligible to participate in the
401(k) Program, which is generally designed to assist employers or plan
sponsors
in the creation and operation of retirement plans qualified under Section
401(a)
of the Code. To the extent applicable, the same terms and conditions are
offered
all Participating Plans in the 401(k) Program which include 401(k) plans,
other
types of participant directed, tax-qualified employee benefit plans and
employer-sponsored non-qualified employee benefit plans.
The Fund offers to Participating Plans three classes of shares, Class A,
Class
B and Class D shares, as investment alternatives under the 401(k) Program.
Class
A shares are available to all Participating Plans and are the only investment
alternative for Participating Plans that are eligible to purchase Class A
shares
at net asset value without a sales charge. In addition, Class B shares are
offered only to Participating Plans satisfying certain criteria with respect
to
the amount of the initial investment and number of employees eligible to
participate in the Plan at that time. Alternatively, Class D shares are
offered
only to Participating Plans that meet other criteria relating to the amount of
initial investment and number of employees eligible to participate in the Plan
at that time, as described below.
The Class A and Class B shares acquired through the 401(k) Program are
subject
to the same service and/or distribution fees as, but different sales charge
and
CDSC schedules than, the Class A and Class B shares acquired by other
investors.
Class D shares acquired by Participating Plans are offered at net asset value
per share without any sales charges or CDSC. The Fund pays annual service and
distribution fees based on the value of the average daily net assets
attributable to this Class.
27
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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. The sales charges for Class A shares acquired by
Participating
Plans are as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE
AS %
AMOUNT OF INVESTMENT OF OFFERING PRICE OF NET ASSET
VALUE
<S> <C> <C>
- ------------------------------------------------------------------------------
- --------
Less than $25,000 5.00% 5.26%
$25,000 but under $100,000 4.00% 4.17%
$100,000 but under $250,000 3.25% 3.36%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $750,000 2.00% 2.04%
$750,000 or more 0.00% 0.00%
- ------------------------------------------------------------------------------
- -------
</TABLE>
A Participating Plan will have a combined right of accumulation, under
which,
to qualify for a reduced sales charge, it may combine the value of Class A
shares being purchased with the value of Class A shares already held in the
Fund
and in any of the funds listed below under "Exchange Privilege" that are sold
with a sales charge.
Class A shares of the Fund may be offered without any sales charge to any
Participating Plan that: (a) purchases $750,000 or more of Class A shares of
one
or more funds in the Smith Barney Shearson Group of Funds under the combined
right of accumulation described above; (b) has 250 or more employees eligible
to
participate in the Participating Plan at the time of initial investment in the
Fund; or (c) currently holds Class A shares in the Fund that were received as
a
result of an exchange of Class B or Class D shares of the Fund as described
below.
Class A shares acquired through the 401(k) Program will not be subject to a
CDSC.
CLASS B SHARES. Under the 401(k) Program, Class B shares are offered to
Participating Plans that: (i) purchase less than $250,000 of Class B shares of
one or more funds in the Smith Barney Shearson Group of Funds that are sold
subject to a CDSC; and (ii) that have less than 100 employees eligible to
participate in the Participating Plan at the time of initial investment in the
Fund. Class B shares acquired by such Plans will be subject to a CDSC of 3% of
redemption proceeds, if redeemed within eight years of the date the
28
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plan first purchases Class B shares. No CDSC is imposed to the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current net asset value of Class B shares purchased through
reinvestment
of dividends or capital gains distributions, plus (b) the current net asset
value of Class B shares purchased more than eight years prior to the
redemption,
plus (c) increases in the net asset value of the shareholder's Class B shares
above the purchase payments made during the preceding eight years. The CDSC
applicable to a Participating Plan depends on the number of years since the
Participating Plan first became a holder of Class B shares, unlike the CDSC
applicable to other Class B shareholders, which depends on the number of years
since those shareholders made the purchase payment from which the amount is
being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a)
the retirement of an employee in the Participating Plan, (b) the termination
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 Class B shares in connection with a loan made by the
Participating Plan to an employee.
Eight years after the date a Participating Plan acquired its first Class B
share, it will be offered the opportunity to exchange all of its Class B
shares
for Class A shares of the Fund. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Fund but instead may acquire Class A shares of the Fund.
If the Participating Plan elects not to exchange all of its Class B shares at
that time, each Class B share held by the Participating Plan will have the
same
conversion feature as Class B shares held by other investors. See "Variable
Pricing System -- Class B Shares."
CLASS D SHARES. Class D shares are offered to Participating Plans that: (i)
purchase less than $750,000 but more than $250,000 of Class D shares of one or
more funds in the Smith Barney Shearson Group of Funds that
29
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
offer one or more Classes of shares subject to a sales charge and/or CDSC; or
(ii) have no more than 250 employees eligible to participate in the
Participating Plan at the time of initial investment in the Fund.
Class D shares acquired by Participating Plans will be offered at net asset
value per share without any sales charges or CDSC. The Fund pays annual
service
and distribution fees based on the value of the average daily net assets
attributable to this Class. Class D shares are not subject to an automatic
conversion feature as are the Class B shares. However, beginning in December
1993 and each year thereafter, Participating Plans which hold Class D shares
valued at $750,000 or more in any fund or funds in the Smith Barney Shearson
Group of Funds that offer one or more Classes of shares subject to a sales
charge and/or CDSC will be offered the opportunity to exchange all of their
Class D shares for Class A shares. Such Plans will be notified of the pending
exchange 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 March in the following
calendar
year. Once the exchange has occurred, a Participating Plan will not be
eligible
to acquire Class D shares of the Fund but instead may acquire Class A shares
of
the Fund. Any Class D shares not converted will continue to be subject to the
distribution fee.
Participating Plans wishing to acquire shares of the Fund through the 401(k)
Program must purchase shares from the Fund's transfer agent.
For further information regarding the 401(k) Program, investors should
contact
their Smith Barney Financial Consultants.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
Shareholders may redeem their shares on any day that the Fund calculates its
net asset value. See "Valuation of Shares." Redemption requests received in
proper form prior to the close of regular trading on the NYSE are priced at
the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value
next determined. If a shareholder holds shares in more than one Class, any
request for redemption must specify the Class being redeemed. In the event of
a
failure to specify which Class or if the investor owns fewer
30
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
shares of the Class than specified, the redemption request will be delayed
until
the Fund's transfer agent receives further instructions from Smith Barney, or
if
the shareholder's account is not with Smith Barney from the shareholder
directly.
The Fund normally transmits redemption proceeds for credit to the
shareholder's account at Smith Barney or the Introducing Broker at no charge
(other than any applicable CDSC) within seven days after receipt of a
redemption
request. Generally, these funds will not be invested for the shareholder's
benefit without specific instruction and Smith Barney will benefit from the
use
of temporarily uninvested funds. A shareholder who pays for Fund shares by
personal check will be credited with the proceeds of a redemption of those
shares only after the purchase check has been collected, which may take up to
10
days or more. A shareholder who anticipates the need for more immediate access
to his or her investment should purchase shares with federal funds, by bank
wire
or by certified or cashier's check.
A Fund account that is reduced by a shareholder to a value of $500 or less
may
be subject to redemption by the Fund, but only after the shareholder has been
given at least 30 days in which to increase the account balance to $500 or
more.
Shares may be redeemed in one of the following ways:
REDEMPTION THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney or an Introducing
Broker.
A shareholder desiring to redeem shares represented by certificates must also
present such certificates to Smith Barney or the Introducing Broker endorsed
for
transfer (or accompanied by an endorsed stock power), signed exactly as the
shares are registered. Redemption requests involving shares represented by
certificates will not be deemed received until such certificates are received
by
the Company's transfer agent in proper form.
31
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to your Smith Barney Financial Consultant. All other shares
may
be redeemed by submitting a written request for redemption to:
Smith Barney Shearson European Fund
Class A, B or D (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney Financial Consultant
must (a) state the Class and number or dollar amount of shares to be redeemed,
(b) identify the shareholder's account number and (c) be signed by each
registered owner exactly as the shares are registered. If the shares to be
redeemed were issued in certificate form, the certificates must be endorsed
for
transfer (or be accompanied by an endorsed stock power) and must be submitted
to
TSSG together with the redemption request. Any signature appearing on a
redemption request, share certificate or stock power must be guaranteed by a
domestic bank, savings and loan institution, domestic credit union, member
bank
of a Federal Reserve System or member firm of a national securities exchange.
TSSG may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until TSSG receives all required
documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly. Retirement plan
accounts
are eligible for automatic cash withdrawal plans only where the shareholder is
eligible to receive qualified distributions and has an account value of at
least
$5,000. Any applicable CDSC will be waived on amounts withdrawn by a
shareholder
that do not exceed 2.0% per month of the value of shareholder's shares subject
to the CDSC at the time the
32
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
withdrawal plan commences. For further information regarding the automatic
cash
withdrawal plan, shareholders should contact their Smith Barney Financial
Consultants.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
A CDSC payable to Smith Barney is imposed on any redemption of Class B
shares,
however effected, that causes the current value of a shareholder's account to
fall below the dollar amount of all payments by the shareholder for the
purchase
of Class B shares ("purchase payments") during the preceding five years,
except
in the case of purchases by Participating Plans in the 401(k) Program, as
described above. See "Purchase of Shares -- Smith Barney 401(k) Program." No
charge is imposed to the extent that the net asset value of the Class B shares
redeemed does not exceed (a) the current net asset value of Class B shares
purchased through reinvestment of dividends or capital gains distributions,
plus
(b) the current net asset value of Class B shares purchased more than five
years
prior to the redemption, plus (c) increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding five years.
In circumstances in which the CDSC is imposed, 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, except in the case of purchases
through
Participating Plans in the 401(k) Program, which are subject to a different
CDSC. See "Purchase of Shares -- Smith Barney 401(k) Program." Solely for
purposes of determining the number of years since a purchase payment, all
purchase payments during a month will be aggregated and deemed to have been
made
on the last day of the preceding
33
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders other than
Participating Plans:
<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
0.00%
Seventh
0.00%
Eighth
0.00%
- ------------------------------------------------------------------------------
- ----
</TABLE>
Class B shares will automatically convert to Class A shares approximately
eight years after the date on which they were purchased and thereafter will no
longer be subject to a distribution fee. The first of these conversions will
commence on or about September 30, 1994. See "Variable Pricing System -- Class
B
Shares."
The purchase payment from which a redemption of Class B shares is made is
assumed to be the earliest purchase payment from which a full redemption has
not
already been effected. In the case of redemptions of Class B shares of other
funds in the Company or of other funds in the Smith Barney Shearson Group of
Funds issued in exchange for Class B shares of the Fund, the term "purchase
payments" refers to the purchase payments for the shares given in exchange. In
the event of an exchange of Class B shares of funds with differing CDSC
schedules, the shares will be, in all cases, subject to the higher CDSC
schedule. See "Exchange Privilege."
WAIVERS OF CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts that do not exceed 2.0%
per month of the value of the shareholder's Class B shares at the time the
withdrawal plan commences (see below); (c) redemptions of shares following the
death or disability of the shareholder; (d) redemptions of shares in
connection
with certain post-retirement distributions and withdrawals from retirement
plans
or IRAs; (e) involuntary redemptions; (f) redemption proceeds from other funds
in the Smith Barney Shearson Group of Funds that are reinvested within 30 days
of the redemption;
34
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
(g) redemptions of shares in connection with a combination of any investment
company with the Fund by merger, acquisition of assets or otherwise; and (h)
certain redemptions of shares of the Fund in connection with lump-sum or other
distributions made by a Participating Plan. See "Purchase of Shares -- Smith
Barney 401(k) Program."
- --------------------------------------------------------------------
VALUATION OF SHARES
Each Class' net asset value per share is calculated separately on each day,
Monday through Friday, except on days when 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.
The net asset value per share of a given Class is determined as of the later
of the close of regular trading on the NYSE (currently 4:00 p.m., New York
time)
or the Chicago Board Options Exchange (currently 4:15 p.m., New York time) and
is computed by dividing the value of the Fund's net assets attributable to
that
Class by the total number of shares of that Class of the Fund outstanding.
A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there were
no
sales during the day, at the current quoted bid price. In cases where
securities
are traded on more than one exchange, the securities are valued on the
exchange
designated by or under the authority of the Board of Directors as the primary
market. Fund securities which are primarily traded on foreign exchanges may be
valued with the assistance of a pricing service and are generally valued at
the
preceding closing values of such securities on their respective exchanges,
except that when an occurrence subsequent to the time a foreign security is
valued is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under
the
direction of the Board of Directors. Unlisted foreign securities are valued at
the mean between the last available bid and offer price prior to the time of
valuation. U.S. over-the-counter securities will be
35
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
valued on the basis of the bid price at the close of business on each day.
Securities and assets for which market quotations are not readily available
are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class in the
following funds in the Smith Barney Shearson Group of Funds to the extent
shares
are offered for sale in the shareholder's state of residence:
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
<S> <C>
-----------------------------------------------------------------------------
- --
MUNICIPAL BOND FUNDS
A SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND, an
intermediate-term municipal bond fund investing in
investment
grade obligations.
A, B SMITH BARNEY SHEARSON MANAGED MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund.
A, B SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND, an
intermediate-
and long-term municipal bond fund investing in medium and
lower rated securities.
A, B SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
Arizona investors.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS FUND, an intermediate- and long-term municipal
bond
fund designed for California investors.
</TABLE>
36
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
-----------------------------------------------------------------------------
- --
<S> <C>
A, B SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
California investors.
A, B SMITH BARNEY SHEARSON FLORIDA MUNICIPALS FUND, an
intermediate- and long-term municipal bond fund designed for
Florida investors.
A, B SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPALS FUND, an
intermediate- and long-term municipal bond fund designed for
Massachusetts investors.
A, B SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
New Jersey investors.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY NEW YORK
MUNICIPALS FUND, an intermediate-term bond fund designed for
New York investors.
A, B SMITH BARNEY SHEARSON NEW YORK MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
New York investors.
INCOME FUNDS
A, B, D+ SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME
FUND,
seeks high current income while limiting the degree of
fluctuation in net asset value resulting from movement in
interest rates.
A SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND,
invests
exclusively in securities issued by the U.S. Treasury and
other U.S. government securities.
</TABLE>
37
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
-----------------------------------------------------------------------------
- --
<S> <C>
A, B, D+ SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND,
seeks
high current income primarily by allocating and reallocating
its assets among various types of fixed-income securities.
A, B, D+ SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC., invests
in obligations issued or guaranteed by the United States
government and its agencies and instrumentalities with
emphasis on mortgage-backed government securities.
A, B, D+ SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND, seeks a
high
current return by investing in U.S. government securities.
A, B, D+ SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND, seeks a
high
level of current income consistent with prudent investment
management and preservation of capital by investing in
corporate bonds and other income producing securities.
A, B, D+ SMITH BARNEY SHEARSON HIGH INCOME FUND, seeks high current
income by investing in high-yielding corporate bonds,
debentures and notes.
A, B, D+ SMITH BARNEY SHEARSON GLOBAL BOND FUND, seeks current income
and capital appreciation by investing in bonds, debentures
and
notes of foreign and domestic issuers.
GROWTH AND INCOME FUNDS
A, B, D+ SMITH BARNEY SHEARSON CONVERTIBLE FUND, seeks current income
and capital appreciation by investing in convertible
securities.
A, B, D+ SMITH BARNEY SHEARSON UTILITIES FUND, seeks total return by
investing in equity and debt securities of utilities
companies.
</TABLE>
38
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
-----------------------------------------------------------------------------
- --
<S> <C>
A, B, D+ SMITH BARNEY SHEARSON STRATEGIC INVESTORS FUND, seeks high
total return consisting of current income and capital
appreciation by investing in a combination of equity, fixed-
income and money market securities.
A, B, D+ SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND, seeks total
return by investing in dividend-paying common stocks.
A, B, D+ SMITH BARNEY SHEARSON GROWTH AND INCOME FUND, seeks income
and
long-term capital growth by investing in income producing
equity securities.
GROWTH FUNDS
A, B, D+ SMITH BARNEY SHEARSON APPRECIATION FUND INC., seeks long-
term
appreciation of capital.
A, B, D+ SMITH BARNEY SHEARSON FUNDAMENTAL VALUE FUND INC., seeks
long-term capital growth with current income as a secondary
objective.
A, B, D+ SMITH BARNEY SHEARSON TELECOMMUNICATIONS GROWTH FUND, seeks
capital appreciation, with income as a secondary
consideration.
A, B, D+ SMITH BARNEY SHEARSON AGGRESSIVE GROWTH FUND INC., seeks
above-average capital growth.
A, B, D+ SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND, seeks long-term
capital appreciation by investing in equity securities
primarily of emerging growth companies.
A, B, D+ SMITH BARNEY SHEARSON GLOBAL OPPORTUNITIES FUND, seeks
long-term capital growth by investing principally in the
common stocks of foreign and domestic issuers.
</TABLE>
39
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
-----------------------------------------------------------------------------
- --
<S> <C>
A, B, D+ SMITH BARNEY SHEARSON PRECIOUS METALS AND MINERALS FUND
INC.,
seeks long-term capital appreciation by investing primarily
in
precious metal- and mineral-related companies and gold
bullion.
MONEY MARKET FUNDS
* SMITH BARNEY SHEARSON MONEY MARKET FUND, invests in a
diversified portfolio of high quality money market
instruments.
** SMITH BARNEY SHEARSON DAILY DIVIDEND FUND, invests in a
variety of money market instruments.
** SMITH BARNEY SHEARSON GOVERNMENT AND AGENCIES FUND, invests
in
United States government and agency securities.
++ SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND, invests
in
short-term high quality municipal obligations.
++ SMITH BARNEY SHEARSON CALIFORNIA MUNICIPAL MONEY MARKET
FUND,
invests in short-term, high quality California municipal
obligations.
++ SMITH BARNEY SHEARSON NEW YORK MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality New York municipal
obligations.
---------------------------------------------------------------------------
<FN>
*Shares of this money market fund may be exchanged for Class B shares of the
Fund.
**Shares of this money market fund may be exchanged for Class A and Class D
shares of the Fund.
+Class D shares of this Fund may be acquired only by Participating Plans.
++Shares of this money market fund may be exchanged for Class A shares of
the
Fund.
</TABLE>
TAX EFFECT. The exchange of shares of one fund for shares of another fund is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize
a
taxable gain or loss in connection with an exchange.
40
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
CLASS A EXCHANGES. Class A shareholders of the funds in the Smith Barney
Shearson Group of Funds sold without a sales charge or with a maximum sales
charge of less than 5.0% will be subject to the appropriate "sales charge
differential" upon the exchange of their shares for Class A shares of the Fund
or other funds sold with a higher sales charge. The "sales charge
differential"is limited to a percentage rate no greater than the excess of the
sales charge rate applicable to purchases of shares of the mutual fund being
acquired in the exchange over the sum of the rates of all sales charges
previously paid on the mutual fund shares relinquished in the exchange and on
any predecessor of those shares. For purposes of the exchange privilege,
shares
obtained through automatic reinvestment of dividends, as described below, are
treated as having paid the same sales charges applicable to the shares on
which
the dividends were paid. However, except in the case of the 401(k) Program, if
no sales charge was imposed upon the initial purchase of the shares, any
shares
obtained through automatic reinvestment will be subject to a sales charge
differential upon exchange.
CLASS B EXCHANGES. Class B shareholders of the Fund who wish to exchange all
or part of their Class B shares for Class B shares of any of the funds
identified above may do so without the imposition of an exchange fee. Upon an
exchange, the new Class B shares will be deemed to have been purchased on the
same date as the Class B shares of the Fund which have been exchanged.
CLASS D EXCHANGES. Class D shares of the Fund will be exchangeable for Class
D
shares of the funds listed above. Class D shareholders who wish to exchange
all
or part of their Class D shares in any of these funds may do so without
charge.
Class D shares may be acquired only by Participating Plans.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders
exercising the exchange privilege with other funds in the Company or any other
fund in the Smith Barney Shearson Group of Funds should review the prospectus
relating to the exchanged-for shares carefully prior to making an exchange.
Smith Barney reserves the right to reject any exchange request and the
exchange
privilege may be modified or terminated at any time after notice to
shareholders.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its
shareholders.
The Fund's investment adviser may determine that a pattern of
41
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
frequent exchanges is excessive and contrary to the best interests of the
Fund's
other shareholders. In this event, the Fund's investment adviser will notify
Smith Barney, and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, Smith Barney will provide notice in writing or by telephone to
the shareholder at least 15 days prior to suspending the exchange privilege
and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or exchange into any
of the other Smith Barney funds ordinarily available, which position the
shareholder would expect to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
For further information regarding the exchange privilege or to obtain a
current prospectus for the other funds in the Company or any other fund in the
Smith Barney Shearson Group of Funds, shareholders should contact their Smith
Barney Financial Consultant.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and
serves as the distributor of the Fund's shares. Smith Barney is a wholly owned
subsidiary of Holdings which is in turn an indirect wholly owned subsidiary of
Travelers. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the rate of 0.25% of the value of
the
average daily net assets of the respective Class. Smith Barney is also paid an
annual distribution fee with respect to Class B and Class D shares at the rate
of 0.75% of the value of the average daily net assets attributable to those
classes. The fees are authorized pursuant to a distribution and service plan
(the "Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act and
are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class D shares, to cover
expenses primarily intended to result in the sale of those shares of the Fund.
These expenses include: costs of printing and distributing the Fund's
Prospectus, Statement of Additional Information and sales literature to
prospective investors; an allocation of overhead and other Smith Barney branch
office distribution-related expenses;
42
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- ---------------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
payments to and expenses of Smith Barney Financial Consultants and other
persons
who provide support services in connection with the distribution of the
shares;
and accruals for interest on the amount of the foregoing expenses that exceed
distribution fees and, in the case of Class B shares, the CDSC received by
Smith
Barney. The payments to Smith Barney Financial Consultants for selling shares
of
a class include a commission paid at the time of sale and a continuing fee for
servicing shareholder accounts for as long as a shareholder remains a holder
of
that Class. The service fee is credited at the rate of 0.25% of the value of
average daily net assets of the Class that remain invested in the Fund. Smith
Barney Financial Consultants may receive different levels of compensation for
selling one Class of shares over another.
Although it is anticipated that some promotional activities will be
conducted
on a Company-wide basis, payments made by a fund under the Plan generally will
be used to finance the distribution of shares of such fund. Expenses incurred
in
connection with Company-wide activities may be allocated pro-rata among all
funds of the Company on the basis of their relative net assets.
Payments under the Plan 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 Company's Board of
Directors evaluates the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so will consider all relevant factors, including
expenses borne by Smith Barney and the amount received under the Plan and the
proceeds of the CDSC and sales charges received.
On a quarterly basis, the Company's Board of Directors reviews a report on
expenditures under the Plan and the purposes for which those expenditures were
made. The Directors conduct an additional, more extensive review annually in
determining whether the Plan will be continued. By its terms, continuation of
the Plan from year to year is contingent on annual approval by a majority of
the
Company's Directors and by a majority of the Directors who are not "interested
persons" as defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of the Plan or related agreements (the
"Plan
Directors"). The Plan
43
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- --------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
may be terminated with respect to the Fund at any time by vote of a majority
of
the Plan Directors or a majority of the outstanding shares of the Fund.
For additional information on the Plan, see the discussion under
"Distribution
Arrangements" in the Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in
determining the amount of dividends from net investment income and
distributions
of capital gains payable to shareholders. Dividends and any distributions
automatically are reinvested in additional shares at net asset value unless
the
shareholder has elected to receive distributions in cash. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares. Dividends, if any, consisting of net
investment
income of the Fund will be declared and paid annually. Any net realized
long-term capital gains, after distribution of capital loss carryforwards,
will
be distributed at least annually. Net realized short-term capital gains may be
paid with the distribution of dividends from net investment income. The per
share dividends and distributions on Class A shares will be higher than the
per
share dividends and distributions on Class B and Class D shares as a result of
lower distribution and transfer agency fees applicable to the Class A shares.
See "Variable Pricing System." In addition, as determined by the Board of
Directors, distributions of the Fund may include a return of capital.
Shareholders will be notified of the amount of any distribution that
represents
a return of capital. In order to comply with a calendar year distribution
requirement under the Code, it may be necessary for the Fund to make
distributions at times other than those set forth above.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a
44
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Company-wide basis. The Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Code. In any taxable year in
which
the Fund so qualifies and distributes at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses),
the Fund (but not its shareholders) generally will be relieved of federal
income
tax on the investment company taxable income and net realized capital gains
(the
excess of net long-term capital gains over net short-term capital losses), if
any, distributed to shareholders. In order to qualify as a regulated
investment
company, the Fund will be required to meet various Code requirements.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital gain dividends are taxable to shareholders
as
long-term capital gain regardless of the length of time a shareholder may have
held shares of the Fund.
Dividends (including capital gain dividends) declared by the Fund in
October,
November or December of any calendar year to shareholders of record on a date
in
such a month will be deemed to have been received by shareholders on December
31
of that calendar year, provided that the dividend is actually paid by the Fund
during January of the following calendar year.
Certain foreign currency forward contracts in which the Fund may invest are
"section 1256 contracts." Gains or losses in section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain section 1256
contracts (including foreign currency forward contracts) generally are treated
as ordinary income or loss. Also, section 1256 contracts held by the Fund at
the
end of each taxable year are "marked-to-market" with the result that
unrealized
gains or losses are treated as though
45
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
they were realized. These contracts also may be marked-to-market for purposes
of
the 4% excise tax and for other purposes under rules prescribed pursuant to
the
Code.
Certain foreign currency forward contracts entered into by the Fund may
result
in "straddles" for federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund on straddle positions.
In addition, losses realized by the Fund on straddle positions may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized. The
Fund may make one or more of the elections applicable to straddles. If the
Fund
makes any of the elections, the amount, character and timing of the
recognition
of gains and losses from the affected straddle positions will be determined
under rules that vary according to the elections made. Because only a few of
the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
Under the Code, gains or losses attributable to fluctuations in exchange
rates
which occur between the time the Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and
the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of foreign currency forward contracts, gains or losses
attributable
to fluctuations in the value of a foreign currency between the date of
acquisition of the security or contract and the date of disposition also
generally are treated as ordinary gain or loss. These gains or losses,
referred
to under the Code as "section 988" gains or losses, may increase or decrease
the
amount of the Fund's investment company taxable income to be distributed to
its
shareholders.
It is expected that certain dividends and interest received by the Fund will
be subject to foreign withholding taxes. If more than 50% in value of the
Fund's
total assets at the close of any fiscal year consists of stocks or securities
of
foreign corporations, the Fund may elect to treat any foreign income and
similar
taxes paid by it as paid by its shareholders. If the Fund makes the election,
shareholders will be required to include in income their proportionate share
of
the amount of foreign taxes paid or accrued by the
46
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Fund and will be entitled to claim, subject to limitations, either a credit or
deduction (if they itemize their deductions) for their share of the taxes in
computing their federal income tax.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are
capital
assets in the shareholder's hands, and generally will be long-term or short-
term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the
shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation.
Dividends, if any, consisting of interest from obligations of the U.S.
government and certain of its agencies and instrumentalities may be exempt
from
all state and local income taxes. Investors should consult their tax advisors
for specific information on the tax consequences of particular types of
distributions.
- --------------------------------------------------------------------
THE FUND'S PERFORMANCE
TOTAL RETURN
From time to time, the Fund may advertise the "average annual total return"
over various periods of time for each Class. Such total return figures show
the
average percentage change in value of an investment in the Class from the
beginning date of the measuring period to the end of the measuring period.
These
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the
period
were reinvested in shares of the same Class. Class A total return figures
include the maximum initial 5.0% sales charge and
47
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
THE FUND'S PERFORMANCE (CONTINUED)
Class B total return figures include any applicable CDSC. These figures also
take into account the service and distribution fees, if any, payable with
respect to the Classes.
Total return figures will be given for recent one-, five- and ten-year
periods
or the life of a Class to the extent it has not been in existence for any such
period, and may be given for other periods as well, such as on a year-by-year
basis. When considering average annual total return figures for periods longer
than one year, it is important to note that the total return for any one year
in
the period might have been greater or less than the average for the entire
period. "Aggregate" total return figures may be used for various periods,
representing the cumulative change in value of an investment in the shares for
the specific period (again reflecting changes in the Fund's share prices and
assuming reinvestment of dividends and distributions). Aggregate total returns
may be calculated either with or without the effect of the maximum 5.0% sales
charge or any applicable CDSC and may be shown by means of schedules, charts
or
graphs, and may indicate subtotals of the various components of total return
(I.E., change in the value of initial investment, income dividends, and
capital
gains distributions). Because of the differences in sales charges and
distribution and other fees, the total returns for each of the Classes will
differ.
In reports or other communications to shareholders or in advertising
material,
performance of a Class may be compared with that of other mutual funds or
classes of shares of other funds listed in the rankings prepared by Lipper
Analytical Services, Inc. or similar independent services that monitor the
performance of mutual funds or with other appropriate indices of investment
securities such as the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average and Morgan Stanley Capital International World
Index. The performance information may also include evaluations of the Fund
published by nationally recognized financial publications such as BARRON'S,
BUSINESS WEEK, CDA INVESTMENT TECHNOLOGIES, INC., FORBES, FORTUNE,
INSTITUTIONAL
INVESTOR, INVESTORS DAILY, KIPLINGER'S PERSONAL FINANCE MAGAZINE, MONEY,
MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY and THE WALL
STREET JOURNAL. It is important to note that yield and total return figures
are
based on historical earnings and are not intended to indicate future
performance. To the extent any advertisement or sales literature of the Fund
describes the expenses or performance of a Class, it will also disclose such
information for the other
48
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
THE FUND'S PERFORMANCE (CONTINUED)
Classes. For a description of the methods used to determine total return, see
the Statement of Additional Information. Performance figures may be obtained
from any Smith Barney Financial Consultant.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The
Company commenced operations on January 4, 1982 under the name "Hutton
Investment Series Inc." The Company's corporate name was changed to "SLH
Investment Portfolios Inc." on December 29, 1988. On October 23, 1992, the
Board
of Directors of the Company authorized the Company to do business under the
name
of "Shearson Lehman Brothers Investment Funds" and also authorized a change in
the name of the Fund to European Fund.
On July 30, 1993, the Company's corporate name was changed to its current
name
"Smith Barney Shearson Investment Funds Inc." and the Fund's name was changed
to
Smith Barney Shearson European Fund.
The Fund offers shares of common stock currently classified into three
Classes, A, B and D, with a par value of $.001 per share. Each Class of shares
has the same rights, privileges and preferences, except with respect to: (a)
the
designation 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 matters 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
interests of the holders of the different Classes of shares of the Fund. The
Directors, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place,
Boston, Massachusetts 02108, and serves as custodian of the Company's
investments.
TSSG, a subsidiary of FDC, is located at Exchange Place, Boston,
Massachusetts
02109, and serves as the Company's transfer agent.
49
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
The Company does not hold annual shareholder meetings. There normally will
be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any
purpose
upon written request of shareholders holding at least 10% of the Company's
outstanding shares. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
Generally, shares of the Company will be voted on a Company-wide basis on all
matters except matters affecting only the interests of one Fund or one Class
of
shares.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the 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 Company 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 Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having
multiple accounts (I.E., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. When the Fund's annual
reports are 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 their Smith Barney Financial Consultant or
the
Fund's transfer agent.
-------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT
OF
ADDITIONAL INFORMATION AND/OR IN THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE FUND'S SHARES AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
50
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN FUND
DIRECTORS
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Jeffrey L. Russell
INVESTMENT OFFICER
Kenneth A. Egan
FIRST VICE PRESIDENT
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
Paul F. Roye
ASSISTANT SECRETARY
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10022
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
TRANSFER AGENT
The Shareholders Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit
and Trust Company
One Boston Place
Boston, Massachusetts 02108
51
<PAGE>
SMITH BARNEY SHEARSON
EUROPEAN
FUND
Two World Trade Center
New York, New York 10048
Fund 109, 203, 255
FD0236 E4
Smith Barney Shearson
INVESTMENT FUNDS INC.
Two World Trade Center
New York, New York 10048
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION JUNE 24, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Shearson
Investment Funds Inc. (the "Company"), dated June 24, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Company's Prospectuses. The Company issues a Prospectus for each of the
investment funds offered by the Company (the "Funds"). The Company's Pro-
spectuses may be obtained from any Smith Barney Financial Consultant, or
by writing or calling the Company at the address or telephone number
listed above. This Statement of Additional Information, although not in
itself a prospectus, is incorporated by reference into the Prospectuses in
its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectuses and this Statement of Additional Information, except where shown
below:
<TABLE>
<S>
<C>
Management of the Company (see in the Prospectuses "Management of the Company
and the Fund")
1
Investment Objective and Management Policies
6
Purchase of Shares
24
Redemption of Shares
25
Distributor
26
Valuation of Shares
27
Exchange Privilege
28
Performance Data (see in the Prospectuses "The Fund's Performance")
29
Taxes (see in the Prospectuses "Dividends, Distributions and Taxes")
33
Custodian and Transfer Agent
37
Financial Statements
37
Appendix
A-1
</TABLE>
MANAGEMENT OF THE COMPANY
The executive officers of the Company are employees of certain of the or-
ganizations that provide services to the Company. These organizations are
the following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Greenwich Street Advisors
("Greenwich Street Advisors") Investment Advisers
Smith, Barney Advisers, Inc.
("Smith Barney Advisers")
Smith Barney Advisers Administrator
The Boston Company Advisors, Inc.
("Boston Advisors") Sub-Administrator
Smith Barney Inc.
("Smith Barney") Distributor
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc. ("TSSG"),
a subsidiary of First Data Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Company are
discussed in the Prospectuses and in this Statement of Additional Informa-
tion.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and executive officers of the Company, together with infor-
mation as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person" of the
Company, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Dwight B. Crane, Director. Professor, Graduate School of Business Adminis-
tration, Harvard University. His address is Graduate School of Business
Administration, Harvard University, Boston, Massachusetts 02163.
Alger B. Chapman, Chairman and Chief Operating Officer of the Chicago
Board of Options Exchange. His address is Chicago Board of Options Ex-
change, LaSalle at Van Buren, Chicago, IL 60605.
Frank G. Hubbard, Corporate Vice President, Materials Management and Mar-
keting Services of Huls America, Inc. His address is 80 Centennial Avenue
P.O. Box 456, Piscataway, NJ 08855-0456.
Allan R. Johnson, Director. Retired; Former Chairman, Retail Division of
BATUS, Inc., and Chairman and Chief Executive Officer of Saks Fifth Ave-
nue, Inc. His address is 2 Sutton Place South, New York, New York 10022.
*Heath B. McLendon, Chairman of the Board. Executive Vice President of
Smith Barney and Chairman of Smith Barney Strategy Advisers Inc., an in-
vestment advisory affiliate of Smith Barney ("SBSA"). Prior to July 1993,
Senior Executive Vice President of Shearson Lehman Brothers Inc. ("Shear-
son Lehman Brothers") and Vice Chairman of the Board of Shearson Asset
Management, a member of the Asset Management Group of Shearson Lehman
Brothers. His address is Two World Trade Center, New York, New York 10048.
John F. White, Director. President Emeritus of The Cooper Union for the
Advancement of Science and Art; Special Assistant to the President of the
Aspen Institute. His address is Crows Nest Road, Tuxedo Park, New York
10987.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and Smith
Barney Advisors, and Trustee of Corporate Realty Income Trust I. His ad-
dress is 1345 Avenue of the Americas, New York, New York 10105.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of SBSA. Prior to July 1993, Senior Vice President of
Shearson Lehman Brothers and Vice President of Shearson Lehman Investment
Strategy Advisors Inc., an investment advisory affiliate of Shearson Leh-
man Brothers. His address is Two World Trade Center, New York, New York
10048.
James E. Conroy, First Vice President. Managing Director of Greenwich
Street Advisors. Prior to July 1993, Managing Director of Shearson Lehman
Advisors. His address is Two World Trade Center, New York, New York 10048.
Kenneth A. Egan, First Vice President. Managing Director of Greenwich
Street Advisors. Prior to July 1993, Managing Director of Shearson Lehman
Advisors. His address is Two World Trade Center, New York, New York 10048.
R. Jay Gerken, Investment Officer. Senior Vice President of Greenwich
Street Advisors. Prior to July 1993, Senior Vice President of Shearson Le-
hman Advisors. His address is Two World Trade Center, New York, New York
10048.
George E. Mueller, Jr., Investment Officer. Senior Vice President of
Greenwich Street Advisors. Prior to July 1993, Managing Director of Shear-
son Lehman Advisors. His address is Two World Trade Center, New York, New
York 10048.
George V. Novello, Investment Officer. Managing Director of Greenwich
Street Advisors. Prior to July 1993, Managing Director of Shearson Lehman
Advisors. Prior to September 1990, Mr. Novello was a Managing Director at
McKinley-Allsopp where he served as Head of Research. His address is Two
World Trade Center, New York, New York 10048.
Jeffrey L. Russell, Managing Director, Senior International Equity Portfo-
lio Manager, Smith Barney Advisers. His address is 1345 Avenue of the
Americas, New York, New York 10022.
Lewis E. Daidone, Treasurer. Managing Director of Smith Barney and Direc-
tor and Senior Vice President of Mutual Management Corp. and Smith Barney
Advisers. Prior to January, 1990, Senior Vice President and Chief Finan-
cial Officer of Cortland Financial Group, Inc. His address is 1345 Avenue
of the Americas, New York, New York 10105.
Christina T. Sydor, Secretary. Managing Director of Smith Barney and Sec-
retary of Mutual Management Corp. and Smith Barney Advisers. Her address
is 1345 Avenue of the Americas, New York, New York, 10105.
Paul F. Roye, Assistant Secretary. Partner in the law firm of Dechert
Price & Rhoads. His address is 1500 K Street, N.W., Washington, D.C.
20005.
Messrs. Crane, Johnson, White and McLendon also serve as directors, trust-
ees and/or individual general partners of certain other mutual funds for
which Smith Barney serves as distributor. As of December 31, 1993, the Di-
rectors and officers of the Company, as a group, owned less than 1% of the
outstanding common stock of the Company.
No officer, director or employee of Smith Barney or Boston Advisors or of
any parent or subsidiary receives any compensation from the Company for
serving as an officer or Director of the Company. The Company pays each
Director who is not an officer or employee of Smith Barney or Boston Advi-
sors or any of their affiliates a fee of $14,000 per annum plus $3,000 per
meeting attended and reimburses travel and out-of-pocket expenses. For the
fiscal year ended December 31, 1993, such fees and expenses totalled ap-
proximately $147,980.00.
INVESTMENT ADVISERS -- GREENWICH STREET ADVISORS AND SMITH BARNEY ADVISERS
ADMINISTRATOR -- SMITH BARNEY ADVISERS
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Greenwich Street Advisors and Smith Barney Advisers serve as investment
advisers to one or more of the Funds pursuant to written agreements with
the Funds (the "Advisory Agreements"), which, with the exception of the
European Funds' Advisory Agreement, were most recently approved by the
Board of Directors, including a majority of the Directors who are not "in-
terested persons" of the Company or the investment advisers (the "Indepen-
dent Directors"), on April 7, 1993 and by shareholders of the respective
Funds on June 9, 1993. The Advisory Agreement for European Fund was most
recently approved by the Board of Directors, including a majority of the
Independent Directors, on February 8, 1994 and by shareholders of European
Fund on May 10, 1994. Each of the investment advisers pays the salary of
any officer and employee who is employed by both it and the Company. The
services provided by the investment advisers under the Advisory Agreements
are described in the Prospectuses under "Management of the Company." Both
Smith Barney Advisers and Greenwich Street Advisors, a division of Mutual
Management Corp., provide investment advisory and management services to
investment companies affiliated with Smith Barney. Smith Barney is a
wholly owned subsidiary of Smith Barney Holdings Inc., which is in turn a
wholly owned subsidiary of The Travelers Inc. ("Travelers").
For the fiscal years ended December 31, 1991, 1992 and 1993, the Funds ac-
crued approximate advisory fees as follows:
<TABLE>
<CAPTION>
FUND 1991 1992 1993
<S> <C> <C> <C>
Investment Grade Bond Fund $1,792,000 $1,879,000
$2,157,373
Government Securities Fund 4,771,000 3,926,000
3,357,123
Special Equities Fund 421,000 385,000
548,764
European Fund 203,000 189,000
195,586
</TABLE>
Smith Barney Advisers serves as administrator to each Fund pursuant to a
written agreement dated May 4, 1994 (the "Administration Agreement"),
which was first approved by the Board of Directors, including a majority
of the Independent Directors, on May 4, 1994.
Boston Advisors serves as sub-administrator to each Fund pursuant to a
written agreement with the Fund and Smith Barney Advisers dated May 4,
1994 (the "Sub-administration Agreement"). Prior to May 4, 1994, Boston
Advisors acted as the Fund's administrator and prior to the close of busi-
ness on May 21, 1993, Boston Advisors acted as the Funds' sub-investment
adviser and administrator. Boston Advisors is a wholly owned subsidiary of
The Boston Company, Inc. ("TBC"), a financial services holding company,
which is in turn a wholly owned subsidiary of Mellon Bank Corporation
("Mellon").
Prior to the close of business on May 21, 1993 (the "Closing"), TBC was an
affiliate of Shearson Lehman Brothers and, in connection with its sale to
Mellon, Shearson Lehman Brothers conditionally agreed (with certain excep-
tions) that neither it nor its subsidiaries would provide custody services
(other than to investment companies) or master trust services for a period
of three years, and that neither it nor its subsidiaries would provide
custody or administration services to certain investment companies and/or
clients of TBC and its subsidiaries for a period of one to seven years. In
addition, Shearson Lehman Brothers conditionally agreed (with certain ex-
ceptions) that, for a period of seven years (a) with respect to each in-
vestment company for which both (i) TBC or its subsidiary provided custody
services, administration services or investment advisory services (not su-
badvisory services) on September 14, 1992 and (ii) Shearson Lehman Broth-
ers or its subsidiaries serve as investment adviser or principal under-
writer, Shearson Lehman Brothers would, to the extent consistent with its
fiduciary duties and other applicable law, recommend TBC or its subsidiary
as a provider of such services, and (b) it would recommend TBC or its sub-
sidiary as the provider of custody services and administration services
for any investment company for which Shearson Lehman Brothers or its sub-
sidiaries become an investment adviser or principal underwriter.
On July 30, 1993, Travelers and Smith Barney Harris Upham & Co. Incorpo-
rated ("Smith Barney Harris Upham") purchased certain assets and assumed
certain liabilities of Shearson Lehman Brothers and Smith Barney Harris
Upham was renamed "Smith Barney Shearson Inc." On June 1, 1994, Smith Bar-
ney Shearson Inc. was renamed "Smith Barney Inc." Under the asset purchase
agreement between Smith Barney Harris Upham and Shearson Lehman Brothers,
as regards the above-described provisions, Smith Barney Harris Upham
agreed with American Express Company that Smith Barney Harris Upham and
its pertinent affiliates would be bound by those provisions described in
the preceding paragraph to the extent that Shearson Lehman Brothers and
its pertinent affiliates would have been bound if the sale to Smith Barney
Harris Upham had not occurred.
On February 8, 1994, the Company's Board of Directors determined to termi-
nate the Company's investment advisory agreement with Lehman Brothers Glo-
bal Asset Management Limited ("LBGAM"), an indirect wholly owned subsid-
iary of American Express Company, with respect to European Fund, and to
enter into an investment advisory agreement with Smith Barney Advisers.
Such agreement, which was ratified by European Fund's shareholders on May
10, 1994, provides for the provision of investment advisory services by
Smith Barney Advisers to European Fund for the same fee as was paid to
LBGAM.
Certain of the services provided to the Company by Smith Barney Advisers
pursuant to the Administration Agreement are described in the Prospectuses
under "Management of the Company and the Fund." In addition to those ser-
vices, Smith Barney Advisers pays the salaries of all officers and employ-
ees who are employed by both it and the Company, maintains office facili-
ties for the Company, furnishes the Company with statistical and research
data, clerical help and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services required by the
Company, prepares reports to the Company's shareholders and prepares tax
returns, reports to and filings with the Securities and Exchange Commis-
sion (the "SEC") and state Blue Sky authorities. Smith Barney Advisers
bears all expenses in connection with the performance of its services.
Pursuant to the Sub-administration Agreement, Smith Barney Advisers has
contracted with Boston Advisors for the provision of certain of these ser-
vices.
For the fiscal years ended December 31, 1991, 1992 and 1993, the Funds ac-
crued approximate sub-investment advisory and/or administration fees as
follows:
<TABLE>
<CAPTION>
FUND 1991 1992 1993
<S> <C> <C> <C>
Investment Grade Bond Fund $ 796,000 $ 835,000 $
958,700
Government Securities Fund 2,726,000 2,243,000
1,918,367
Special Equities Fund 153,000 140,000
199,551
European Fund 60,000* 53,000
55,902
<FN>
* For the fiscal year ended December 31, 1991, 100% of the sub-investment
advisory and administration fees were waived by Boston Advisors for the
European Fund.
</TABLE>
The Company bears expenses incurred in its operation, including taxes, in-
terest, brokerage fees and commissions, if any; fees of Directors who are
not officers, directors, shareholders or employees of the investment ad-
visers, Smith Barney or Boston Advisors; SEC fees and state Blue Sky qual-
ification fees; charges of custodians; transfer and dividend disbursing
agent's fees; certain insurance premiums; outside auditing and legal ex-
penses; costs of maintenance of corporate existence; investor services
(including allocated telephone and personnel expenses); and costs of prep-
aration and printing of prospectuses for regulatory purposes and for dis-
tribution to existing shareholders, shareholders' reports and corporate
meetings.
Each investment adviser and Smith Barney Advisers have agreed that if in
any fiscal year the aggregate expenses of a Fund (including fees paid pur-
suant to the Advisory and Administration Agreements, but excluding inter-
est, taxes, brokerage 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, the investment
advisers and Smith Barney Advisers will, to the extent required by law,
reduce their management fees for the Fund by the amount of such excess ex-
pense, such amount to be allocated between them in the proportion that
their respective fees bear to the aggregate of such fees paid by the Fund.
Such a fee reduction, if any, will be reconciled on a monthly basis. The
most restrictive state limitation applicable to the Company would require
the investment advisers and Smith Barney Advisers to reduce their fees in
any year that such excess expenses exceed 2.5% of the first $30 million of
average net assets, 2% of the next $70 million of average net assets and
1.5% of the remaining average net assets. No fee reduction was required
for the 1993, 1992 and 1991 fiscal years.
COUNSEL AND AUDITORS
Dechert Price & Rhoads serves as counsel to the Company and from time to
time provides certain legal services to Boston Advisors. Paul F. Roye, a
partner at Dechert Price & Rhoads, is Assistant Secretary of the Company.
Sullivan & Worcester serves as counsel to the Independent Director.
Coopers & Lybrand, independent accountants, One Post Office Square, Bos-
ton, Massachusetts 02109, serve as auditors of the Company and render an
opinion on the Company's financial statements annually.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of each Fund and the
policies they employ to achieve such objectives. The following discussion
supplements the description of the Funds' investment objectives and man-
agement policies contained in the Prospectuses.
INVESTMENT GRADE BOND FUND
The investment objective of the Investment Grade Bond Fund is to provide
as high a level of current income as is consistent with prudent investment
management and preservation of capital. The Fund seeks to achieve its ob-
jective by investing in the following securities: -- Corporate bonds which
are rated Aaa, Aa, A, or Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A, or BBB by Standard & Poor's Corporation ("S&P")
(See Appendix for a description of these ratings). -- U.S. government se-
curities (See below). -- Commercial paper issued by domestic corporations
rated Prime-1 or Prime-2 by Moody's or A-1+, A-1 or A-2 by S&P or, if not
rated by Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P (See Ap-
pendix). -- Negotiable bank certificates of deposit or bankers' acceptan-
ces issued by domestic banks (but not their foreign branches) having to-
gether with branches or subsidiaries, total assets in excess of $1 bil-
lion. -- High-yielding common stocks (which may be purchased directly or
acquired through the exercise of warrants or the conversion of fixed-
income securities) -- Warrants.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such
ratings, however, are relative and subjective, are not absolute standards
of quality and do not evaluate the market risk of the securities. Although
the Fund's investment adviser uses these ratings as a criterion for the
selection of securities for the Fund, the Fund's investment adviser also
relies on its independent analysis to evaluate potential investments for
the Fund. The Fund's achievement of its investment objectives may be more
dependent on the investment adviser's credit analysis of low-rated and un-
rated securities than would be the case for a portfolio of higher-rated
securities.
Subsequent to its purchase by the Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. In addition, it is possible that Moody's and S&P
might not timely change their ratings of a particular issue to reflect
subsequent events. None of these events will require the sale of the secu-
rities by the Fund, although the investment adviser will consider these
events in determining whether the Fund should continue to hold the securi-
ties. To the extent that the ratings given by Moody's or S&P for securi-
ties may change as a result of changes in the rating systems or due to a
corporate reorganization of Moody's and/or S&P, the Fund will attempt to
use comparable ratings as standards for its investments in accordance with
the investment objectives and policies of the Fund.
As a condition of its continuing registration in a state, the Fund has un-
dertaken that Investment Grade Bond Fund's investments in warrants, valued
at the lower of cost or market, will not exceed 5% of the value of its net
assets. Included within that amount, but not to exceed 2% of the Fund's
net assets, may be warrants which are not listed on either the New York
Stock Exchange, Inc. (the "NYSE") or the American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities will be deemed to
be without value for purposes of this restriction. These limits are not
fundamental policies of the Fund and may be changed by the Board of Direc-
tors without shareholder approval.
Investment Grade Bond Fund may enter into repurchase agreements, reverse
repurchase agreements and firm commitment agreements and may lend its
portfolio securities, in each case in accordance with the description of
those techniques (and subject to the same risks) set forth below. The Fund
may purchase American Depositary Receipts ("ADRs"), which are dollar-
denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are pub-
licly traded on exchanges or over-the-counter in the United States.
Investment Grade Bond Fund may also sell securities "short against the
box." While a short sale is the sale of a security the Fund does not own,
it is "against the box" if at all times when the short position is open,
the Fund owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the
same issue as the securities sold short. Short sales against the box are
used to defer recognition of capital gains or losses or to extend the
holding period of securities for certain federal income tax purposes.
It is the Fund's policy that at least 65% of the assets of Investment
Grade Bond Fund will be invested in bonds, except during times when the
investment adviser believes that adoption of a temporary defensive posi-
tion by investing more heavily in cash or money market instruments (such
as short-term U.S. government securities, commercial paper, and negotiable
bank certificates of deposit) is desirable due to prevailing market or
economic conditions. This policy was adopted in accordance with guidelines
of the SEC which require that any investment company whose name implies
that it invests primarily in a particular type of security have a policy
of investing at least 65% of its total assets in that type of security
under normal market conditions. This policy may be changed without share-
holder approval in the event the SEC guidelines are modified.
Repurchase Agreements. The Fund may purchase securities and concurrently
enter into repurchase agreements with certain member banks of the Federal
Reserve System having total assets in excess of $100 million and certain
dealers on the Federal Reserve Bank of New York's list of reporting deal-
ers. Repurchase agreements are contracts under which the buyer of a secu-
rity simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities sub-
ject to the repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party, including possible delays or restric-
tions upon a Fund's ability to dispose of the underlying securities, the
risk of a possible decline in the value of the underlying securities dur-
ing 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 repurchase agreement.
The investment adviser and the administrator of the Fund, acting under the
supervision of the Company's Board of Directors, review on an ongoing
basis the value of the collateral and the creditworthiness of those banks
and dealers with which the Fund enters into repurchase agreements to eval-
uate potential risks. The Fund will not enter into repurchase agreements
that would cause more than 10% of its total assets to be invested in "il-
liquid" securities.
Reverse Repurchase Agreements. A reverse repurchase agreement involves
the sale of a money market instrument held by the Fund coupled with an
agreement by the Fund to repurchase the instrument at a stated price, date
and interest payment. The Fund will use the proceeds of a reverse repur-
chase agreement to purchase other money market instruments which either
mature at a date simultaneous with or prior to the expiration of the re-
verse repurchase agreement or which are held under an agreement to resell
maturing as of that time.
The Fund will enter into a reverse repurchase agreement only when the in-
terest income to be earned from the investment of the proceeds of the
transaction is greater than the interest expense of the transaction. Under
the 1940 Act, reverse repurchase agreements may be considered to be bor-
rowings by the seller. The Fund may not enter into a reverse repurchase
agreement if, as a result, its current obligations under such agreements
would exceed one-third of the current market value of the Fund's total as-
sets (less all of its liabilities other than obligations under such agree-
ments).
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires
the creation and maintenance of a segregated account with the Company's
custodian consisting of U.S. government securities or cash or cash equiva-
lents.
Firm Commitment Agreements. The Fund may enter into firm commitment
agreements (when-issued purchases) for the purchase of securities at an
agreed-upon price on a specified future date. Such agreements might be en-
tered into, for example, when a decline in the yield of securities of a
given issuer is anticipated and a more advantageous yield may be obtained
by committing currently to purchase securities to be issued later.
The Fund will not enter into such agreements for the purpose of investment
leverage. Liability for the purchase price, and all the rights and risks
of ownership of the securities, accrue to the Fund at the time it becomes
obligated to purchase such securities, although delivery and payment occur
at a later date. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Fund to pur-
chase the security at a price above the current market price on the date
of delivery and payment. During the time the Fund is obligated to purchase
such securities, it will maintain in a segregated account with the Compa-
ny's custodian, U.S. government securities or cash or cash equivalents of
an aggregate current value sufficient to make payment for the securities.
Lending of Portfolio Securities. The Fund has the ability to lend portfo-
lio securities to brokers, dealers and other financial organizations. Such
loans, if and when made, may not exceed 20% of the Fund's total assets
taken at value. The Fund will not lend portfolio securities to Smith Bar-
ney unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. government securities which are maintained
at all times in an amount at least equal to the current market value of
the loaned securities. From time to time, the Fund may pay a part of the
interest earned from the investment of collateral received for securities
loaned to the borrower and/or a third party which is unaffiliated with the
Fund and is acting as a "finder."
By lending its securities, the Fund can increase its income by continuing
to receive interest on the loaned securities as well as by either invest-
ing the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when U.S. government securities
are used as collateral. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (a) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of
the securities loaned rises above the level of such collateral; (c) the
Fund must be able to terminate the loan at any time; (d) the Fund must re-
ceive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in mar-
ket value; (e) the Fund may pay only reasonable custodian fees in connec-
tion with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event ad-
versely affecting the investment in the loaned securities occurs, the
Board of Directors must terminate the loan and regain the right to vote
the securities.
GOVERNMENT SECURITIES FUND
The investment objective of Government Securities Fund is high current re-
turn. It seeks to achieve its objective by investing in U.S. government
securities and by writing covered call options and secured put options and
by purchasing put options on U.S. government securities. The Fund also may
purchase and sell interest rate futures contracts, and purchase and sell
put and call options on futures contracts, as a means of hedging against
changes in interest rates.
U.S. Government Securities. Direct obligations of the U.S. Treasury in-
clude a variety of securities, which differ in their interest rates, matu-
rities and dates of issuance. Treasury Bills have maturities of one year
or less; Treasury Notes have maturities of one to ten years and Treasury
Bonds generally have maturities of greater than ten years at the date of
issuance.
In addition to direct obligations of the U.S. Treasury, securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities
include securities issued or guaranteed by the Federal Housing Administra-
tion, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Asso-
ciation ("GNMA"), General Services Administration, Central Bank for Coop-
eratives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Federal Land Banks, Federal Maritime Administration, the
Tennessee Valley Authority, District of Columbia Armory Board, Student
Loan Marketing Association, International Bank for Reconstruction and De-
velopment, Resolution Trust Corporation and Federal National Mortgage As-
sociation ("FNMA"). The Fund will invest in obligations of an instrumen-
tality to which the U.S. government is not obligated by law to provide
support only if the Fund's investment adviser determines that the credit
risk with respect to the instrumentality does not make its securities un-
suitable for investment by the Fund.
Some U.S. government securities are supported by the full faith and credit
of the U.S. Treasury; others are supported by the right of the issuers to
borrow from the U.S. Treasury; others, such as those of FNMA, are sup-
ported by the discretionary authority of the U.S. government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumen-
tality. No assurance can be given that the U.S. government would provide
financial support to a U.S. government-sponsored instrumentality when it
is not obligated to do so by law. The Fund will invest in the securities
of such U.S. government agencies and instrumentalities only when it is
satisfied that the credit risk is minimal.
It is the Fund's policy that at least 65% of its total assets will be in-
vested in U.S. government securities, including options and futures con-
tracts thereon, except during times when the investment adviser believes
that adoption of a temporary defensive position by investing more heavily
in cash or money market instruments is desirable due to prevailing market
or economic conditions. This policy was adopted in accordance with guide-
lines of the SEC which require that any investment company whose name im-
plies that it invests primarily in a particular type of security have a
policy of investing at least 65% of its total assets in that type of secu-
rity under normal market conditions. This policy may be changed without
shareholder approval in the event that the SEC's guidelines are modified.
The Fund's current distribution return consists generally of interest in-
come from U.S. government securities, premiums from expired put and call
options written by the Fund, net gains from closing purchase and sale
transactions, and net gains from sales of portfolio securities pursuant to
options or otherwise.
Exchange Rate-Related U.S. Government Securities. Government Securities
Fund has the ability to invest up to 5% of its net assets in U.S. govern-
ment securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between
the U.S. dollar and the currency of one or more foreign countries ("Ex-
change Rate-Related Securities"). The interest payable on these securities
is denominated in U.S. dollars, is not subject to foreign currency risk
and, in most cases, is paid at rates higher than most other U.S. govern-
ment securities in recognition of the foreign currency risk component of
Exchange Rate-Related Securities.
Exchange Rate-Related Securities are issued in a variety of forms, depend-
ing on the structure of the principal repayment formula. The principal re-
payment formula may be structured so that the securityholder will benefit
if a particular foreign currency to which the security is linked is stable
or appreciates against the U.S. dollar. In the alternative, the principal
repayment formula may be structured so that the securityholder benefits if
the U.S. dollar is stable or appreciates against the linked foreign cur-
rency. Finally, the principal repayment formula can be a function of more
than one currency and, therefore, be designed in either of the aforemen-
tioned forms or a combination of those forms.
Investments in Exchange Rate-Related Securities entail special risks.
There is the possibility of significant changes in rates of exchange be-
tween the U.S. dollar and any foreign currency to which an Exchange Rate-
Related Security is linked. If currency exchange rates do not move in the
direction or to the extent anticipated at the time of purchase of the se-
curity, the amount of principal repaid at maturity might be significantly
below the par value of the security, which might not be offset by the in-
terest earned by the Fund over the term of the security. The rate of ex-
change between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. The imposition or modification of foreign exchange controls by
the United States or foreign governments or intervention by central banks
also could affect exchange rates. Finally, there is no assurance that suf-
ficient trading interest to create a liquid secondary market will exist
for particular Exchange Rate-Related Securities due to conditions in the
debt and foreign currency markets. Illiquidity in the forward foreign ex-
change market and the high volatility of the foreign exchange market may
from time to time combine to make it difficult to sell an Exchange Rate-
Related Security prior to maturity without incurring a significant price
loss.
Options Activities. Government Securities Fund may write (i.e., sell)
call options on U.S. government securities ("calls"). The Fund writes only
"covered" call options, which means that so long as the Fund is obligated
as the writer of a call option, it will own the underlying securities sub-
ject to the option, or, in the case of options on certain U.S. government
securities as described further below, it will maintain in a segregated
account with the Company's custodian, cash or cash equivalents or U.S.
government securities with a value sufficient to meet its obligations
under the call.
When the Fund writes a call, it receives a premium and gives the purchaser
the right to buy the underlying U.S. government security at any time dur-
ing the call period (usually between three and nine months, but not more
than fifteen months) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund forgoes
any gain from an increase in the market price of the underlying security
over the exercise price.
The Fund may purchase a call on securities only to effect a "closing pur-
chase transaction," which is the purchase of a call covering the same un-
derlying security and having the same exercise price and expiration date
as the call previously written by the Fund on which it wishes to terminate
its obligation. Government Securities Fund also may purchase call options
on futures contracts, as described below. If the Fund is unable to effect
a closing purchase transaction, it will not be able to sell the underlying
security until the call previously written by the Fund expires (or until
the call is exercised and the Fund delivers the underlying security).
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the pre-
mium, plus commission costs, paid to purchase the call or put is less (or
greater) than the premium, less commission costs, received on the sale of
the call or put. A gain also will be realized if a call or put which the
Fund has written lapses unexercised, because the Fund would retain the
premium. See "Taxes."
Government Securities Fund also may write and purchase put options
("puts") on U.S. government securities. When the Fund writes a put, it re-
ceives a premium and gives the purchaser of the put the right to sell the
underlying U.S. government security to the Fund at the exercise price at
any time during the option period. When the Fund purchases a put, it pays
a premium in return for the right to sell the underlying U.S. government
security at the exercise price at any time during the option period. If
any put is not exercised or sold, it will become worthless on its expira-
tion date. The Fund will not purchase puts if more than 10% of its net as-
sets would be invested in premiums on puts.
The Fund may write puts only if they are "secured." A put is "secured" if
the Fund maintains cash, cash equivalents or U.S. government securities
with a value equal to the exercise price in a segregated account or holds
a put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by a
Fund will not exceed 50% of its net assets. The Fund also may write
"straddles," which are combinations of secured puts and covered calls on
the same underlying U.S. government security.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options
on U.S. government securities is relatively new, so that it is impossible
to predict to what extent liquid markets will develop or continue. The
Fund has undertaken with a state securities commission that it will limit
losses from all options transactions to 5% of its average net assets per
year, or cease options transactions until in compliance with the 5% limi-
tation, but there can be no absolute assurance that these limits can be
adhered to.
The Company's custodian, or a securities depository acting for it, will
act as escrow agent as to the securities on which the Fund has written
puts or calls, or as to other securities acceptable for such escrow, so
that no margin deposit will be required of the Fund. Until the underlying
securities are released from escrow, they cannot be sold by the Fund.
SPECIAL CONSIDERATIONS RELATING TO OPTIONS ON CERTAIN U.S. GOVERNMENT
SECURITIES
Treasury Bonds and Notes. Because trading interest in U.S. Treasury bonds
and notes tends to center on the most recently auctioned issues, the ex-
changes will not continue indefinitely to introduce new expirations to re-
place expiring options on particular issues. The expirations introduced at
the commencement of options trading on a particular issue will be allowed
to run, with the possible addition of a limited number of new expirations
as the original expirations expire. Options trading on each issue of bonds
or notes will thus be phased out as new options are listed on more recent
issues, and a full range of expirations will not ordinarily be available
for every issue on which options are traded.
Treasury Bills. Because the deliverable U.S. Treasury bill changes from
week to week, writers of U.S. Treasury bill calls cannot provide in ad-
vance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long posi-
tion in U.S. Treasury bills with a principal amount corresponding to the
contract size of the option, it may be hedged from a risk standpoint. In
addition, the Fund will maintain U.S. Treasury bills maturing no later
than those which would be deliverable in the event of the exercise of a
call option it has written in a segregated account with its custodian so
that it will be treated as being covered for margin purposes.
GNMA Certificates. GNMA Certificates are mortgage-backed securities rep-
resenting part ownership of a pool of mortgage loans. These loans are made
by private lenders and are either insured by the Federal Housing Adminis-
tration or guaranteed by the Veterans Administration. Once approved by
GNMA, the timely payment of interest and principal on each mortgage in a
"pool" of such mortgages is guaranteed by the full faith and credit of the
U.S. government. Unlike most debt securities, GNMA Certificates provide
for repayment of principal over the term of the loan rather than in a lump
sum at maturity. GNMA Certificates are called "pass-through" securities
because both interest and principal payments on the mortgages are passed
through to the holder.
Since the remaining principal balance of GNMA Certificates declines each
month as mortgage payments are made, the Fund as a writer of a GNMA call
may find that the GNMA Certificates it holds no longer have a sufficient
remaining principal balance to satisfy its delivery obligation in the
event of exercise of the call option it has written. Should this occur,
additional GNMA Certificates from the same pool (if obtainable) or re-
placement GNMA Certificates will have to be purchased in the cash market
to meet delivery obligations.
The Fund will either replace GNMA Certificates representing cover for call
options it has written or will maintain in a segregated account with its
custodian cash or cash equivalents or U.S. government securities having an
aggregate value equal to the market value of the GNMA Certificates under-
lying the call options it has written.
Other Risks. In the event of a shortage of the underlying securities de-
liverable on exercise of an option, the Options Clearing Corporation has
the authority to permit other, generally comparable securities to be de-
livered in fulfillment of option exercise obligations. If the Options
Clearing Corporation exercises its discretionary authority to allow such
other securities to be delivered it may also adjust the exercise prices of
the affected options by setting different prices at which otherwise ineli-
gible securities may be delivered. As an alternative to permitting such
substitute deliveries, the Options Clearing Corporation may impose special
exercise settlement procedures.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To
the extent that the options markets close before the markets for the un-
derlying securities, significant price and rate movements can take place
in the underlying markets that cannot be reflected in the options markets.
Options are traded on exchanges on only a limited number of U.S. govern-
ment securities, and exchange regulations limit the maximum number of op-
tions which may be written or purchased by a single investor or a group of
investors acting in concert. The Company and other clients advised by af-
filiates of Smith Barney may be deemed to constitute a group for these
purposes. In light of these limits, the Board of Directors may determine
at any time to restrict or terminate the public offering of the Fund's
shares (including through exchanges from the other Funds).
Exchange markets in options on U.S. government securities are a relatively
new and untested concept. It is impossible to predict the amount of trad-
ing interest that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
Interest Rate Futures Transactions. The Fund may purchase and sell inter-
est rate futures contracts ("futures contracts") as a hedge against
changes in interest rates. A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future date. Fu-
tures contracts are traded on designated "contracts markets" which,
through their clearing corporations, guarantee performance of the con-
tracts. Currently there are futures contracts based on securities such as
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Generally, if the market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures con-
tract for the sale of securities has an effect similar to the actual sale
of securities, although sale of the futures contract might be accomplished
more easily and quickly. For example, if the Fund holds long-term U.S.
government securities and the investment adviser anticipates a rise in
long-term interest rates, it could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar long-term
securities. If rates increased and the value of the Fund's securities de-
clined, the value of the Fund's futures contracts would increase, thereby
protecting the Fund by preventing net asset value from declining as much
as it otherwise would have. Similarly, entering into a futures contract
for the purchase of securities has an effect similar to actual purchase of
the underlying securities, but permits the continued holding of securities
other than the underlying securities. For example, if the investment ad-
viser expects long-term interest rates to decline, the Fund might enter
into futures contracts for the purchase of long-term securities, so that
it could gain rapid market exposure that may offset anticipated increases
in the cost of securities it intends to purchase, while continuing to hold
higher-yield short-term securities or waiting for the long-term market to
stabilize. See "Taxes."
The Appendix contains additional information on the characteristics and
risks of interest rate futures contracts.
Options on Futures Contracts. Government Securities Fund also may pur-
chase and sell listed put and call options on futures contracts. An option
on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the option period. When an op-
tion on a futures contract is exercised, delivery of the futures position
is accompanied by cash representing the difference between the current
market price of the futures contract and the exercise price of the option.
The Fund may purchase put options on interest rate futures contracts in
lieu of, and for the same purpose as, sale of a futures contract. It also
may purchase such put options in order to hedge a long position in the un-
derlying futures contract in the same manner as it purchases "protective
puts" on securities. See "Options Activities."
The purchase of call options on interest rate futures contracts is in-
tended to serve the same purpose as the actual purchase of the futures
contract, and the Fund will set aside cash and cash equivalents sufficient
to purchase the amount of portfolio securities represented by the underly-
ing futures contracts. The Fund generally would purchase call options on
interest rate futures contracts in anticipation of a market advance when
it is not fully invested.
The Fund would write a call option on a futures contract in order to hedge
against a decline in the prices of the debt securities underlying the fu-
tures contracts. If the price of the futures contract at expiration is
below the exercise price, the Fund would retain the option premium, which
would offset, in part, any decline in the value of its portfolio securi-
ties.
The writing of a put option on a futures contract is similar to the pur-
chase of the futures contract, except that, if the market price declines,
the Fund would pay more than the market price for the underlying securi-
ties. The net cost to the Fund will be reduced, however, by the premium on
the sale of the put, less any transaction costs. See "Taxes."
Limitations on Transactions in Futures and Options on Futures. Government
Securities Fund will not engage in transactions in futures contracts or
related options for speculation but only as a hedge against changes in the
market values of debt securities held, or intended to be purchased by, the
Fund, and where the transactions are appropriate to reduction of the
Fund's risks. The Fund may not purchase futures contracts or related op-
tions if, immediately thereafter, more than 30% of the Fund's total assets
would be so invested. In purchasing and selling futures contracts and re-
lated options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commissions ("CFTC"), under which the Fund is
excluded from regulation as a "commodity pool." In order to prevent lever-
age in connection with the purchase of futures contracts by the Fund, an
amount of cash, cash equivalents and/or U.S. government securities equal
to the market value of futures contracts purchased will be maintained in a
segregated account with the custodian (or broker).
The Fund's futures transactions will be entered into for traditional hedg-
ing purposes -- that is, futures contracts will be sold (or related put
options purchased) to protect against a decline in the price of securities
that the Fund owns, or futures contracts (or related call options) will be
purchased to protect the Fund against an increase in the price of securi-
ties it is committed to purchase. See Appendix, "Supplementary Description
of Interest Rate Futures Contracts and Related Options."
Leverage Through Borrowing. Government Securities Fund may borrow up to
25% of the value of its net assets on an unsecured basis from banks to in-
crease its holdings of portfolio securities or to acquire securities to be
placed in a segregated account with its custodian for various purposes
(e.g., to secure puts written by the Fund). The Fund is required to main-
tain continuous asset coverage of 300% with respect to such borrowings,
and to sell (within three days) sufficient portfolio holdings to restore
such coverage, if it should decline to less than 300% due to market fluc-
tuations or otherwise, even if disadvantageous from an investment stand-
point. Leveraging will exaggerate the effect of any increase or decrease
in the value of portfolio securities on the Fund's net asset value, and
money borrowed will be subject to interest costs (which may include com-
mitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the interest and option premiums received from
the securities purchased with borrowed funds.
SPECIAL EQUITIES FUND
The investment objective of Special Equities Fund is long-term capital ap-
preciation. It seeks to achieve this objective by investing in common
stocks, or securities convertible into or exchangeable for common stocks
(such as convertible preferred stocks, convertible debentures or war-
rants), which the investment adviser believes to have superior apprecia-
tion potential.
The Fund invests primarily in equity securities of secondary companies
that have yet to reach a fully mature stage of earnings growth. These com-
panies may still be in the developmental stage or may be older companies
that appear to be entering a new stage of more rapid earnings progress due
to factors such as management change or development of new technology,
products or markets. A significant number of these companies may be in
technology areas and may have annual sales less than $300 million.
Some of the securities in which the Fund invests may not be listed on a
national securities exchange, but such securities will usually have an es-
tablished over-the-counter market. However, some of the securities in
which the Fund invests may have limited marketability, and the Fund may
invest up to 10% of its total assets in securities the disposition of
which would be subject to legal restrictions ("restricted securities"). It
may be difficult to sell restricted securities at a price which represents
the investment adviser's opinion of their fair value until they may be
sold publicly. The Fund ordinarily will acquire the right to have such se-
curities registered at the expense of the issuer within some specified pe-
riod of time. Where registration is required prior to sale, a considerable
period of time may elapse between a decision to sell the restricted secu-
rities and the time when the Fund could sell them, during which period the
price may change. The Fund may not invest in restricted securities of pub-
lic utilities.
The Fund may also acquire securities subject to contractual restrictions
on its right to resell them. These restrictions might prevent their sale
at a time when sale would otherwise be desirable. No restricted securities
and no securities for which there is no readily available market ("illiq-
uid securities") will be acquired if such acquisition would cause the ag-
gregate value of illiquid and restricted securities to exceed 10% of the
Fund's total assets. The Fund may not invest more than 5% of its total as-
sets in securities of issuers which, together with any predecessor, have
been in operation for less than three years.
Special Equities Fund also may invest in, or enter into repurchase agree-
ments with respect to, corporate bonds, U.S. government securities, com-
mercial paper, certificates of deposit or other money market securities
during periods when the investment adviser believes that adoption of a de-
fensive position is desirable due to prevailing market or economic condi-
tions. Special Equities Fund may lend its portfolio securities, in accor-
dance with the description set forth under "Investment Grade Bond Fund --
Lending of Portfolio Securities" above. Special Equities Fund's invest-
ments in warrants are subject to the same undertaking applicable to In-
vestment Grade Bond Fund, as described above. The limits contained in that
undertaking are not fundamental policies of the Fund and may be changed by
the Board of Directors without the vote of shareholders. Special Equities
Fund may also sell securities "short against the box," in accordance with
the description set forth above. The Fund may also purchase ADRs.
Investors should realize that the very nature of investing in smaller,
newer companies involves greater risk than is customarily associated with
investing in larger, more established companies. Smaller, newer companies
often have limited product lines, markets or financial resources, and they
may be dependent for management upon one of a few key persons. The securi-
ties of such companies may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or than
the market averages in general. In accordance with its investment objec-
tive of long-term capital appreciation, securities purchased for Special
Equities Fund will not generally be traded for short-term profits, but
will be retained for their longer-term appreciation potential. This gen-
eral practice limits the Fund's ability to adopt a defensive position by
investing in money market instruments during periods of market downturn.
Accordingly, while in periods of market upturn the Fund may outperform the
market averages, in periods of downturn, it is likely to underperform the
market averages. Thus, investing in Special Equities Fund may involve
greater risk than investing in the other Funds.
EUROPEAN FUND
European Fund's investment objective is long-term capital appreciation,
which the Fund seeks to achieve by investing primarily in equity securi-
ties of issuers in its investment area.
Selecting Investments. In determining the appropriate distribution of in-
vestments among various countries and geographic regions for European
Fund, the investment adviser ordinarily considers the following factors:
prospects for relative economic growth among foreign countries; expected
levels of inflation; government policies influencing business conditions;
the outlook for currency relationships; and the range of the individual
investment opportunities available to international investors.
In analyzing companies for investment by the Fund, the investment adviser
ordinarily looks for one or more of the following characteristics: an
above-average earnings growth per share; high return on invested capital;
healthy balance sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective research and
product development and marketing; efficient service; pricing flexibility;
strength of management; and general operating characteristics which will
enable the companies to compete successfully in their respective market-
place.
There may be times when, in the opinion of management, prevailing market,
economic or political conditions warrant reducing the proportion invested
in equity securities from the primary investment areas below 65% of the
Fund's assets and increasing the proportion held in cash or short-term ob-
ligations denominated in dollars or other currencies. A portion of the
Fund's assets will normally be held in dollars or short-term interest-
bearing dollar-denominated securities to provide for ongoing expenses and
redemptions.
Because European Fund will buy and sell securities denominated in curren-
cies other than the U.S. dollar, and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Fund will engage in
foreign currency exchange transactions. These transactions will either be
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or the Fund will use forward contracts to pur-
chase or sell foreign currencies. A forward foreign currency exchange con-
tract will involve an obligation by the Fund to purchase or sell a spe-
cific amount of currency at a future date, which may be any fixed number
of days from the date of the contract upon which the parties agree, at a
price set at the time of the contract. These contracts are transferable in
the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage
for trades. Neither spot transactions nor forward exchange contracts will
eliminate fluctuations in the prices of the Fund's securities or in for-
eign exchange rates, or prevent loss if the prices of such securities
should decline.
European Fund may enter into forward foreign exchange contracts in order
to hedge against risks arising from either specific transactions or aggre-
gate portfolio positions. When the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency which the
Fund does not hold, it may desire to "lock in" the price of the security
on the basis of current or anticipated exchange rates. The Fund will then
enter into a forward contract for the purchase or sale of the amount of
foreign currency involved in the underlying securities transactions; in
this manner, the Fund will be better able to protect itself against a pos-
sible loss resulting from an adverse change in exchange rates during the
period between the date the securities are purchased or sold and the date
on which payment is made or received. In such cases, the Fund will retain
in a segregated account the full amount in the relevant currency needed to
cover this forward contract.
When the investment adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar
or another foreign currency, it may enter into a forward contract to sell
the amount of foreign currency approximating the value of some or all of
the Fund's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such se-
curities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-
term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. The Fund
generally will not attempt to hedge all of its portfolio positions and
will enter into such transactions only to the extent, if any, deemed ap-
propriate by the investment adviser. The Fund generally will not enter
into such forward contracts or maintain a net exposure to such contracts
when the consummation of the contracts would obligate the Fund to deliver
an amount of foreign currency in excess of the value of the Fund's securi-
ties or other assets denominated in that currency. Under normal circum-
stances, the Fund expects that any appreciation (depreciation) on such
forward exchange contracts will be approximately offset by the deprecia-
tion (appreciation) in translation of the underlying foreign investment
arising from fluctuations in foreign currency exchange rates.
Although the Fund values its assets daily in terms of U.S. dollars, the
Fund will not normally convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do real-
ize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to sell that currency to
the dealer.
The Company is not aware at this time of the existence of any investment
or exchange control regulations which might substantially impair the oper-
ations of the Company as described in the Prospectuses and this Statement
of Additional Information. It should be noted, however, that this situa-
tion could change at any time.
The Fund will recognize the unrealized appreciation or depreciation from
the fluctuation in a foreign currency forward contract as an increase or
decrease in the Fund's net assets on a daily basis, thereby providing an
appropriate measure of the Fund's financial position and changes in finan-
cial position.
The Fund may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai Bonds") and may invest in dollar-denominated bonds sold
in the United States by non-U.S. issuers ("Yankee Bonds"). As compared
with the bonds issued in their countries of domicile, such bond issues
normally carry a higher interest rate but are less actively traded. It is
the policy of the Fund to invest in Samurai or Yankee Bond issues only
after taking into account considerations of quality and liquidity, as well
as yield. These bonds would be issued by Organization for European Cooper-
ation and Development ("OECD") governments or would have "AAA" ratings.
European Fund may invest in ADRs, European Depository Receipts ("EDRs"),
which are designed for trading in European securities markets and are re-
ceipts issued in Europe which evidence a similar ownership arrangement to
ADRs, or securities convertible into securities of eligible European or
Far Eastern issuers. These convertible securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in
American securities markets, and EDRs, in bearer form, are designed for
use in European securities markets.
European Fund may lend its portfolio securities if: (a) such loans are se-
cured continuously by collateral consisting of cash or U.S. government se-
curities maintained on a daily basis as an amount or of a market value at
least equal at all times to the market value of the securities loaned; (b)
the Fund may at any time call such loans and obtain the securities loaned;
(c) the Fund will receive an amount in cash at least equal to the interest
paid by the issuer of the loaned securities during the existence of such
loan; and (d) the Fund will be entitled to the interest paid upon invest-
ment of the cash collateral in its permitted investments or to the payment
of a premium for the loan.
European Fund will invest no more than 10% of the value of its net assets
in warrants valued at the lower of cost or market.
INVESTMENT RESTRICTIONS
The Funds' investment objectives and the investment restrictions set forth
below are fundamental policies of each Fund, i.e., they may not be changed
with respect to a Fund without a majority vote of the outstanding shares
of that Fund. (All other investment practices described in the Prospec-
tuses and the Statement of Additional Information may be changed by the
Board of Directors without the approval of shareholders.)
Unless otherwise indicated, all percentage limitations apply to each Fund
on an individual basis, and apply only at the time a transaction is en-
tered into. (Accordingly, if a percentage restriction is complied with at
the time of investment, a later increase or decrease in the percentage
which results from a relative change in values or from a change in the
Fund's net assets will not be considered a violation.)
Restrictions Applicable to All Funds. No Fund may:
1. purchase the securities of any one issuer, other than the U.S. govern-
ment or its agencies or instrumentalities (or, for European Fund, govern-
ments, agencies or instrumentalities of any jurisdiction in the primary
investment area of the Fund and other OECD countries and the World Bank),
if immediately after such purchase more than 5% of the value of the total
assets of the Fund would be invested in securities of such issuer;
2. invest in real estate, real estate mortgage loans, or interests in
oil, gas and/or mineral exploration or development programs, provided that
this limitation shall not prohibit the purchase of securities issued by
companies, including real estate investment trusts, which invest in real
estate or interests therein;
3. purchase securities of any other investment company, except in connec-
tion with a merger, consolidation, reorganization, or acquisition or as-
sets. European Fund may, under certain circumstances, invest in securities
of other companies. See "Restrictions Applicable to European Fund." (For
purposes of this limitation, foreign banks or their agencies or subsidiar-
ies are not considered "investment companies");
4. make investments in securities for the purpose of exercising control
over or management of the issuer;
5. participate on a joint or a joint and several basis in any trading ac-
count in securities. (The "bunching" of orders of two or more Funds -- or
of one or more Funds and of other accounts -- for the sale or purchase of
portfolio securities shall not be considered participation in a joint se-
curities trading account);
6. purchase the securities of any one issuer if, immediately after such
purchase, the Fund would own more than 10% of the outstanding voting secu-
rities of such issuer;
7. purchase securities on margin, except such short-term credits as are
necessary for the clearance of transactions. (For this purpose, the de-
posit or payment by Government Securities Fund of initial or maintenance
margin in connection with futures contracts and related options is not
considered to be the purchase of a security on margin. Additionally, bor-
rowing by Government Securities Fund and European Fund to increase their
holdings of portfolio securities is not considered to be the purchase of
securities on margin);
8. make loans, except that this restriction shall not prohibit (a) the
purchase and holding of a portion of an issue of publicly distributed debt
securities, (b) the lending of portfolio securities, or (c) entry into re-
purchase agreements;
9. invest in securities of an issuer which, together with any predeces-
sor, has been in operation for less than three years if, as a result, more
than 5% of the total assets of the Fund would then be invested in such se-
curities;
10. purchase the securities of an issuer if, to the Company's knowledge,
one or more of the Directors or officers of the Company individually own
beneficially more than 1/2 of 1% of the outstanding securities of such is-
suer or together own beneficially more than 5% of such securities;
11. purchase a security which is not readily marketable if, as a result,
more than 10% of the Fund's total assets would consist of such securities.
(For purposes of this limitation, restricted securities and repurchase
agreements having more than seven days remaining to maturity are consid-
ered not readily marketable);
12. sell securities short, unless at all times when a short position is
open, it owns an equal amount of the securities or securities convertible
into, or exchangeable without payment of any further consideration for,
securities of the same issue as the securities sold short; or
13. purchase the securities of issuers conducting their principal busi-
ness activities in the same industry, if immediately after such purchase
the value of its investments in such industry would exceed 25% of the
value of the total assets of the Fund, provided that (a) neither all util-
ity companies (including telephone companies), as a group, nor all banks,
savings and loan associations and savings banks, as a group, will be con-
sidered a single industry for purposes of this limitation, and (b) there
is no such limitation with respect to repurchase agreements or to invest-
ments in U.S. government securities or certificates of deposit or bankers'
acceptances issued by domestic institutions (but not their foreign
branches).
Restrictions Applicable to All Funds Except Government Securities Fund and
European Fund. The Funds may not:
1. invest in commodities or commodity futures contracts;
2. borrow amounts in excess of 5% of their total assets taken at cost or
at market value, whichever is lower, and then only from banks as a tempo-
rary measure for extraordinary or emergency purposes. A Fund may not mort-
gage, pledge or in any other manner transfer any of its assets as security
for any indebtedness. This restriction shall not prohibit entry into re-
verse repurchase agreements, provided that a Fund may not enter into a re-
verse repurchase agreement if, as a result, its current obligations under
such agreements would exceed one-third of the current market value of the
Fund's total assets (less its liabilities other than obligations under
such agreements); or
3. write, purchase or sell puts, calls, straddles, spreads or any combi-
nations thereof.
Restrictions Applicable to All Funds Except Special Equities Fund and Eu-
ropean Fund. The Funds may not:
1. purchase securities which may not be resold to the public without reg-
istration under the Securities Act of 1933, as amended (the "1933 Act");
or
2. act as an underwriter of securities.
Restrictions Applicable to Special Equities Fund and European Fund. The
Funds may not act as an underwriter of securities, except that each Fund
may invest up to 10% of its total assets in securities which it may not be
free to resell without registration under the 1933 Act, in which registra-
tion the Fund may technically be deemed an underwriter for purposes of the
1933 Act.
Restrictions Applicable to Investment Grade Bond Fund Only. Investment
Grade Bond Fund may not purchase corporate bonds unless rated at the time
of purchase Baa or better by Moody's or BBB or better by S&P, or purchase
commercial paper unless issued by a U.S. corporation and rated at the time
of purchase Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P (or, if not
rated, issued by a corporation having outstanding debt rated Aa or better
by Moody's or AA or better by S&P), although it may continue to hold a se-
curity if its quality rating is reduced by a rating service below those
specified.
Restrictions Applicable to European Fund Only. The Fund may invest in
shares of other investment companies to the extent permitted by the 1940
Act. With respect to certain countries (e.g., South Korea and Taiwan), in-
vestments by the Fund may only presently be made by acquiring shares of
other investment companies with local governmental approval to invest in
those countries. The 1940 Act provides that the Fund may purchase shares
in an investment company unless (a) such a purchase would cause the Fund
to own in aggregate more than 3% of the total outstanding voting stock of
the company, or (b) such a purchase would cause the Fund to have more than
5% of its assets invested in the company or more than 10% of its assets
invested in an aggregate of all such investment companies. (Investment
through a limited number of approved vehicles may also involve the payment
of substantial premiums above the value of such companies' portfolio secu-
rities. The yield of such securities will be reduced by operating expenses
of such companies including payments to the investment managers of those
investment companies. At such time as direct investment in these countries
is allowed, the Fund anticipates investing directly in these markets.)
BROKERAGE
In selecting brokers or dealers to execute securities transactions on be-
half of a Fund, the Fund's investment adviser seeks the best overall terms
available. In assessing the best overall terms available for any transac-
tion, each investment adviser will consider the factors that the invest-
ment adviser 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 commis-
sion, if any, for the specific transaction and on a continuing basis. In
addition, each investment advisory agreement between the Company and an
investment adviser authorizes the investment adviser, in selecting brokers
or dealers to execute a particular transaction and in evaluating the best
overall terms available, to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Company, the other Funds and other accounts
over which the investment adviser or its affiliates exercise investment
discretion. The fees under the investment advisory agreements and the ad-
ministration agreement between the Company and the investment advisers and
administrator, respectively, are not reduced by reason of their receiving
such brokerage and research services. The Board of Directors periodically
will review the commissions paid by the Funds to determine if the commis-
sions paid over representative periods of time were reasonable in relation
to the benefits inuring to the Company.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the Board of Di-
rectors has determined that transactions for a Fund may be executed
through Smith Barney and other affiliated broker-dealers if, in the judg-
ment of the Fund's investment adviser, the use of such broker-dealer is
likely to result in price and execution at least as favorable as those of
other qualified broker-dealers, and if, in the transaction, such broker-
dealer charges the Fund a rate consistent with that charged to comparable
unaffiliated customers in similar transactions.
SEC rules require that commissions paid to Smith Barney by a Fund on ex-
change transactions not exceed "usual and customary brokerage commis-
sions." The rules define "usual and customary" commissions to include
amounts which are "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connec-
tion with comparable transactions involving similar securities being pur-
chased or sold on a securities exchange during a comparable period of
time." The Board of Directors, particularly those members who are not "in-
terested persons" of the Company (as defined in the 1940 Act), has adopted
procedures for evaluating the reasonableness of commissions paid to Smith
Barney and reviews these procedures periodically.
Portfolio securities are not purchased from or through Smith Barney or any
affiliated person (as defined in the 1940 Act) of Smith Barney where such
entities are acting as principal, except pursuant to the terms and condi-
tions of exemptive rules or orders promulgated by the SEC. Pursuant to an
exemption granted by the SEC, the Company may engage in transactions in-
volving certain money market instruments when Smith Barney and certain of
its affiliates are acting as principal. Pursuant to conditions set forth
in rules of the SEC, the Company may purchase securities from an under-
writing syndicate of which Smith Barney is a member (but not from Smith
Barney). Such conditions relate to the price and amount of the securities
purchased, the commission or spread paid, and the quality of the issuer.
The rules further require that such purchases take place in accordance
with procedures adopted and reviewed periodically by the Board of Direc-
tors, particularly those Directors who are not interested persons of the
Company.
Under rules adopted by the SEC, Smith Shearson may directly execute trans-
actions for a Fund on the floor of any national securities exchange, pro-
vided: (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.
The Funds may use Smith Barney as a commodities broker in connection with
entering into futures contracts and commodity options. Smith Barney has
agreed to charge the Funds commodity commissions at rates comparable to
those charged by Smith Barney to its most favored clients for comparable
trades in comparable accounts.
The following table sets forth certain information regarding each Fund's
payment of brokerage commissions to Smith Barney:
<TABLE>
<CAPTION>
FISCAL YEAR GOVERNMENT SPECIAL
ENDED SECURITIES EQUITIES
EUROPEAN
DECEMBER 31, FUND FUND FUND
<S> <C> <C> <C> <C>
Total Brokerage Commissions 1991 $196,809 $551,741
$139,159
1992 $238,425 $267,089
$143,776
1993 $717,340 --
$100,366
Commissions paid to 1991 $187,850 $74,657
$8,106
Smith Barney*
1992 $0 $56,498
$3,142
1993 $87,550 $16,614
$9,401
% of Total Brokerage 1993 12.2%** 11.9%
9.37%
Commissions paid to
Smith Barney*
% of Total Transactions 1993 .07%** 11.7%
10.56%
involving Commissions paid
to Smith Barney*
<FN>
* Includes commissions paid to Shearson Lehman Brothers prior to the ac-
quisition of certain assets of Shearson Lehman Brothers by Smith Barney
Harris Upham on July 30, 1993.
** The disproportional amount between the percentage of total brokerage
commissions paid to Smith Barney and the percentage of total transac-
tions involving commissions paid to Smith Barney for the Government Se-
curities Fund resulted from higher brokerage commissions for options
and futures transactions which were the only commission transactions
involving Smith Barney.
</TABLE>
PORTFOLIO TURNOVER
For reporting purposes, a Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
fiscal year by the monthly average of the value of the portfolio securi-
ties owned by the Fund during the fiscal year. In determining such portfo-
lio turnover, all securities whose maturities at the time of acquisition
were one year or less are excluded. A 100% portfolio turnover rate would
occur, for example, if all of the securities in the Fund's investment
portfolio (other than short-term money market securities) were replaced
once during the fiscal year.
Investment Grade Bond Fund will not normally engage in the trading of se-
curities for the purpose of realizing short-term profits, but it will ad-
just its portfolio as considered advisable in view of prevailing or antic-
ipated market conditions. Portfolio turnover will not be a limiting factor
should the Fund's investment adviser deem it advisable to purchase or sell
securities.
Special Equities Fund and European Fund invest for long-term capital ap-
preciation and will not generally trade for short-term profits. However,
each portfolio will be adjusted as deemed advisable by the investment ad-
viser, and portfolio turnover will not be a limiting factor should the
Fund's investment adviser deem it advisable to purchase or sell securi-
ties.
The options activities of Government Securities Fund may affect its port-
folio turnover rate and the amount of brokerage commissions paid by the
Fund. The exercise of calls written by the Fund may cause the Fund to sell
portfolio securities, thus increasing its turnover rate. The exercise of
puts also may cause the sale of securities and increase turnover; although
such exercise is within the Fund's control, holding a protective put might
cause the Fund to sell the underlying securities for reasons which would
not exist in the absence of the put. The Fund will pay a brokerage commis-
sion each time it buys or sells a security in connection with the exercise
of a put or call. Some commissions may be higher than those which would
apply to direct purchases or sales of portfolio securities. High portfolio
turnover involves correspondingly greater commission expenses and transac-
tion costs.
For the fiscal years ended December 31, 1992 and 1993, the portfolio turn-
over rates were as follows:
<TABLE>
<CAPTION>
FUND 1992 1993
<S> <C> <C>
Investment Grade Bond Fund 47% 65%
Government Securities Fund 426% 540%
Special Equities Fund 211% 112%
European Fund 108% 68%
</TABLE>
Increased portfolio turnover necessarily results in correspondingly
greater brokerage commissions which must be paid by the Fund. To the ex-
tent that portfolio trading results in realization of net short-term capi-
tal gains, shareholders will be taxed on such gains at ordinary income tax
rates (except shareholders who invest through IRAs and other retirement
plans which are not taxed currently on accumulations in their accounts).
The Funds' investment advisers manage a number of private investment ac-
counts on a discretionary basis. Neither investment adviser is bound by
the recommendations of the Smith Barney research department in managing
the Funds. Although investment decisions are made individually for each
client, at times decisions may be made to purchase or sell the same secu-
rities for one or more of the Funds and/or for one or more of the other
accounts managed by the investment adviser or fund manager. When two or
more such accounts simultaneously are engaged in the purchase or sale of
the same security, transactions are allocated in a manner considered equi-
table to each, with emphasis on purchasing or selling entire orders wher-
ever possible. In some cases, this procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained or
disposed of by the Fund.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges on Class A shares described in the Prospec-
tuses apply to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual or his or her
immediate family 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 Internal Revenue Code
of 1986, as amended (the "Code"), and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning of
the 1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3)
or (13) of the Code; (f) any other organized group of persons, provided
that the organization has been in existence for at least six months and
was organized for a purpose other than the purchase of investment company
securities at a discount; or (g) a trustee or other professional fiduciary
(including a bank, or an investment adviser registered with the SEC under
the Investment Advisers Act of 1940) purchasing shares of a Fund for one
or more trust estates or fiduciary accounts. Purchasers who wish to com-
bine purchase orders to take advantage of volume discounts on Class A
shares should contact their Smith Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospec-
tuses, apply to any purchase of Class A shares if the aggregate investment
in Class A shares of a Fund and in Class A shares of the other funds in
the Company and of other funds in the Smith Barney Shearson Group of Funds
that are sold with a sales charge, including the purchase being made, of
any "purchaser" (as defined above) is $25,000 or more. The reduced sales
charge is subject to confirmation of the shareholder's holdings through a
check of appropriate records. Each Fund reserves the right to terminate or
amend the combined right of accumulation at any time after notice to
shareholders. For further information regarding the rights of accumula-
tion, shareholders should contact their Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICE
Each Fund offers its shares to the public on a continuous basis. The pub-
lic offering price for Class A shares of each Fund is equal to the net
asset value per share at the time of purchase plus a sales charge based on
the aggregate amount of the investment. The public offering price for
Class B shares and Class D shares (and Class A share purchases, including
applicable rights of accumulation, equalling or exceeding $1 million or,
in the case of investors purchasing through the Smith Barney 401(k) Pro-
gram, equalling or exceeding $750,000), 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 shares and Class A shares when
purchased in amounts equalling or exceeding $1 million. The method of com-
putation of the public offering price is shown in each Fund's financial
statements accompanying this Statement of Additional Information.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is included in each
Prospectus. The right of redemption may be suspended or the date of pay-
ment postponed (a) for any period during which the NYSE is closed (other
than for customary weekend and holiday closings), (b) when trading in mar-
kets a Fund normally utilizes is restricted, or an emergency exists, as
determined by the SEC, so that disposal of the Fund's investments or de-
termination of net asset value is not reasonably practicable or (c) for
such other periods as the SEC by order may permit for the protection of
the Fund's shareholders.
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 periodically. Withdrawals of at
least $50 monthly may be made under the Withdrawal Plan by redeeming as
many shares of a Fund as may be necessary to cover the stipulated with-
drawal payment. Any applicable CDSC will not be waived on amounts with-
drawn by shareholders that exceed 2.00% per month of the value of a share-
holder's shares at the time the Withdrawal Plan commences. To the extent
withdrawals exceed dividends, distributions and appreciation of sharehold-
er's investment in the Company, there will be a reduction in the value of
the shareholder's investment and continued withdrawal payments may reduce
the shareholder's investment and ultimately exhaust it. Withdrawal pay-
ments should not be considered as income from investment in the Fund. Fur-
thermore, as it would not generally be advantageous to a shareholder to
make additional investments in the Fund at the same time that he or she is
participating in the Withdrawal Plan, purchases by such shareholders in
amounts of less than $5,000 will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with TSSG as agent for Withdrawal Plan members. All dividends and distri-
butions on shares in the Withdrawal Plan are automatically reinvested at
net asset value in additional shares of the Company. All applications for
participation in the Withdrawal Plan must be received by TSSG as With-
drawal Plan agent no later than the eighth day of the month to be eligible
for participation beginning with that month's withdrawal. The Withdrawal
Plan will not be carried over on exchanges between Funds or classes
("Classes"). A new Withdrawal Plan application is required to establish
the Withdrawal Plan in the new fund or Class. For additional information,
shareholders should contact their Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Company's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
Smith Barney forwards investors' funds for the purchase of shares five
business days after placement of purchase orders (i.e., the "settlement
date"). When payment is made by the investor before the settlement date,
unless otherwise directed by the investor, the funds will be held as a
free credit balance in the investor's brokerage account, and Smith Barney
Shearson may benefit from the temporary use of the funds. The investor may
designate another use for the funds prior to settlement date, such as in-
vestment in a money market fund (other than the Smith Barney Shearson
Money Market Fund) in the Smith Barney Shearson Group of Funds. If the in-
vestor instructs Smith Barney to invest the funds in a money market fund
in the Smith Barney Shearson Group of Funds, the amount of the investment
will be included as part of the average daily net assets of both the Com-
pany and the money market fund, and affiliates of Smith Barney which serve
the funds in an investment advisory capacity will benefit from the fact
that they are receiving fees from both such investment companies for man-
aging these assets computed on the basis of their average daily net as-
sets. The Company's Board of Directors has been advised of the benefits to
Smith Barney resulting from five-day settlement procedures and will take
such benefits into consideration when reviewing the Advisory, Administra-
tion and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Company are distributed on a best efforts basis by Smith
Barney as exclusive sales agent of the Company pursuant to the Distribu-
tion Agreement. To compensate Smith Barney for the services it provides
and for the expense it bears under the Distribution Agreement, the Company
has adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, each Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate
of 0.25% of the value of each Fund's average daily net assets attributable
to the Class A, Class B and Class D shares. In addition, holders of Class
B shares and Class D shares pay a distribution fee primarily intended to
compensate Smith Barney for its initial expense of paying Financial Con-
sultants a commission upon sales of the respective shares. Such shares
distribution fees, which are accrued daily and paid monthly, are calcu-
lated at the annual rate of 0.75% of the value of average daily net assets
attributable to the Class B and Class D shares with respect to Special Eq-
uities Fund and European Fund, and 0.50% of the value of average daily net
assets attributable to the Class B and Class D Shares with respect to Gov-
ernment Securities Fund and Investment Grade Bond Fund.
Prior to July 30, 1993, Shearson Lehman Brothers served as the distributor
of the Company's shares pursuant to a distribution agreement ("SLB Distri-
bution Agreement") substantially the same as the Distribution Agreement.
During the fiscal years ended December 31, 1991 and 1992 Shearson Lehman
Brothers received approximately $24,762,000 and $14,563,000, respectively,
from the Funds under the SLB Distribution Agreement. During the fiscal
year ended December 31, 1993, Smith Barney and Shearson Lehman Brothers
received $5,652,418 and $7,949,875, respectively, under their respective
Distribution Agreements. During the fiscal years ended December 31, 1991
and 1992, Shearson Lehman Brothers received approximately $3,942,000 and
$1,320,000, respectively, representing the CDSC on redemptions of Class B
shares of the Funds. During the fiscal year ended December 31, 1993, Smith
Barney and Shearson Lehman Brothers received $699,139 and $871,809, re-
spectively, representing the CDSC on redemptions of Class B shares of the
Funds. During the fiscal year ended December 31, 1993, Shearson Lehman
Brothers and Smith Barney incurred distribution expenses totalling approx-
imately $18,866,000, consisting of $11,059,000 for support services,
$7,479,000 to Financial Consultants, $50,000 for advertising expenses, and
$278,000 for printing and mailing expenses.
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Board of Directors, including
a majority of the Independent Directors. The Plan may not be amended to
increase the amount to be spent for the services provided by Smith Barney
without shareholder approval, and all amendments of the Plan also must be
approved by the Directors in the manner described above. The Plan may be
terminated at any time, without penalty, by vote of a majority of the In-
dependent Directors or by a vote of a majority of the outstanding voting
securities of the Company (as defined in the 1940 Act) on not more than 30
days' written notice to any other party to the Plan. Pursuant to the Plan,
Smith Barney will provide the Board of Directors periodic reports of
amounts expended under the Plan and the purpose for which such expendi-
tures were made.
VALUATION OF SHARES
The Prospectuses discuss the time at which the net asset value of shares
of each Class is determined for purposes of sales and redemptions. Because
of the differences in distribution fees and Class-specific expenses, the
per share net asset value of each Class will differ. The following is a
description of the procedures used by the Funds in valuing its assets.
As noted in the Prospectuses, the Company will not calculate the net asset
value of the Funds on certain holidays. On those days, securities paid by
a Fund may nevertheless be actively traded, and the value of the Fund's
shares could be significantly affected.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of the net asset value on
European Fund may not take place contemporaneously with the determination
of the prices of many of its respective portfolio securities used in such
calculation. A security which is listed or traded on more than one ex-
change is valued at the quotation on the exchange determined to be the
primary market for such security. All assets and liabilities initially ex-
pressed in foreign currency values will be converted into U.S. dollar val-
ues at the mean between the bid and offered quotations of such currencies
against U.S. dollars as last quoted by any recognized dealer. If such quo-
tations are not available, the rate of exchange will be determined in good
faith by the Board of Directors. In carrying out the Board of Director's
valuation policies, Smith Barney Advisers, as administrator, or Boston Ad-
visors, as sub-administrator, may consult with an independent pricing ser-
vice (the "Pricing Service") retained by the Company.
Debt securities of U.S. issuers (other than U.S. government securities and
short-term investments) are valued by Smith Barney Shearson, as adminis-
trator, or Boston Advisors, as sub-administrator, after consultation with
the Pricing Service approved by the Board of Directors. When, in the judg-
ment of the Pricing Service, quoted bid prices for investments are readily
available and are representative of the bid side of the market, these in-
vestments are valued at the mean between the quoted bid prices and asked
prices. Investments for which, in the judgment of the Pricing Service,
there are no readily obtainable market quotations are carried at fair
value as determined by the Pricing Service. The procedures of the Pricing
Service are reviewed periodically by the officers of the Company under the
general supervision and responsibility of the Board of Directors.
EXCHANGE PRIVILEGE
Class A, Class C and Class D shares of any Fund in the Company may be ex-
changed for shares of the respective Class of many of the funds in the
Smith Barney Shearson Group of Funds, as indicated in the Prospectuses, to
the extent such shares are offered for sale in the shareholder's state of
residence.
Except as noted below, shareholders of any Fund in the Company and of any
fund in the Smith Barney Shearson Group of Funds may exchange all or part
of their shares for shares of the same class of other funds in the Company
and in the Smith Barney Group of Funds as listed in the Prospectuses, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any Fund or company purchased with a sales charge
may be exchanged for Class A shares of any of the other funds, and the
sales charge differential, if any, will be applied. Class A shares of any
fund may be exchanged without a sales charge for shares of the funds that
are offered without a sales charge. Class A shares of any fund purchased
without a sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. 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 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 pur-
chased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney Shearson High Income Fund and
the account number in order to accomplish an exchange of shares of High
Income Fund under paragraph B above.
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 resident 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 any Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds are immediately invested at a price as de-
scribed above, in shares of the fund being acquired with such shares being
subject to any applicable CDSC. 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, a Fund may quote its yield or total return in adver-
tisements or in reports and other communications to shareholders. To the
extent any advertisement or sales literature of a Fund describes the ex-
penses or performance of a Class, it will also disclose such information
for the other Classes.
YIELD
A Fund's 30-day yield figure described in the Prospectuses is calculated
according to a formula prescribed by the SEC. The formula can be expressed
as follows:
YIELD = 2[(ab/cd +1)6 -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding dur-
ing the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day
of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates, the Fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow
of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than
the balance of such Fund's investments, thereby reducing the current yield
of the Fund. In periods of rising interest rates, the opposite can be ex-
pected to occur.
The yields for the 30-day period ended December 31, 1993 for Class A,
Class B and Class D shares of Investment Grade Bond Fund were 6.50%, 6.29%
and 6.31%, respectively, and of Government Securities Fund were 3.65%,
3.38% and 3.33%, respectively.
AVERAGE ANNUAL TOTAL RETURN
A Class' "average annual total return" figures, as described and shown in
the Prospectuses, 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 a 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.
A Class' total return figures calculated in accordance with the above for-
mula assume that the maximum applicable sales charge or maximum applicable
CDSC, as the case may be, has been deducted from the hypothetical $1,000
initial investment at the time of purchase or redemption, as applicable.
The Funds' average annual total returns for Class A shares were as follows
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 6,
1992*
NAME OF FUND DECEMBER 31, 1993 THROUGH DECEMBER
31, 1993
<S> <C> <C>
Investment Grade Bond Fund 13.39% 14.70%
Government Securities Fund 5.88 7.29
Special Equities Fund 26.26 32.88
European Fund 17.29 16.79
<FN>
* The Funds commenced selling Class A shares on November 6, 1992.
</TABLE>
The Funds' average annual total returns for Class B shares were as follows
for the periods indicated:
<TABLE>
<CAPTION>
TEN YEAR PERIOD OR
PERIOD FROM
COMMENCEMENT OF
YEAR ENDED FIVE YEARS ENDED
OPERATIONS THROUGH
NAME OF FUND DECEMBER 31, 1993 DECEMBER 31, 1993
DECEMBER 31, 1993
<S> <C> <C>
<C>
Investment Grade Bond Fund 13.56% 13.15%
12.82%<F1>
Government Securities Fund 5.95 10.54
9.38 <F2>
Special Equities Fund 26.93 13.10
9.26 <F1>
European Fund 17.87 6.87
8.44 <F3>
<FN>
<F1> Figures are for the ten-year period ended December 31, 1993.
<F2> Fund commenced operations on March 20, 1984.
<F3> Fund commenced operations on November 6, 1987.
</TABLE>
These average annual total return figures reflect the deduction of the ap-
plicable CDSC (maximum of 5.00% for Special Equities Fund and European
Fund and 4.50% for Investment Grade Bond Fund and Government Securities
Fund) that would have been deducted upon a redemption of shares at the end
of the periods indicated.
AGGREGATE TOTAL RETURN
A Class' aggregate total return figures, as described and shown in the
Prospectuses, represent the cumulative change in the value of an invest-
ment in the Class for the specified period and are computed by the follow-
ing 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 a 1-, 5- or
10-year period (or fractional portion thereof) at
the end of the 1-, 5- or 10-year period (or frac-
tional portion thereof), assuming reinvestment of
all dividends and distributions.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the Fund's investment portfolio and operat-
ing expenses and the expenses exclusively attributable to the Class. Con-
sequently, any given performance quotation should not be considered repre-
sentative of the Class' performance for any specified period in the fu-
ture. 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 invest-
ment companies' portfolio securities.
The aggregate total returns of the Class A shares of the Funds were as
follows for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM
ONE YEAR NOVEMBER 6, 1992*
ONE YEAR NOVEMBER 6, 1992
PERIOD ENDED THROUGH
PERIOD ENDED THROUGH
NAME OF FUND DECEMBER 31, 1993** DECEMBER 31, 1993**
DECEMBER 31, 1993*** DECEMBER 31, 1993**
<S> <C> <C>
<C> <C>
Investment Grade Bond Fund 18.45% 22.30%
13.12% 16.80%
Government Securities Fund 10.87 13.54
5.88 8.43
Special Equities Fund 32.90 45.51
26.26 38.23
European Fund 23.46 25.61
17.29 19.33
<FN>
* The Funds commended selling Class A shares on November 6, 1992.
** Figures do not include the effect of the maximum sales charge.
*** Figures include the effect of the maximum sales charge.
</TABLE>
The Funds' aggregate total returns for Class B shares were as follows for
the periods indicated:
<TABLE>
<CAPTION>
TEN YEAR PERIOD
TEN YEAR PERIOD
OR PERIOD FROM
OR PERIOD FROM
COMMENCEMENT
COMMENCEMENT
ONE YEAR FIVE YEAR OF OPERATIONS
ONE YEAR FIVE YEAR OF OPERATIONS
PERIOD ENDED PERIOD ENDED THROUGH
PERIOD ENDED PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NAME OF FUND 1993* 1993* 1993*
1993** 1993** 1993**
<S> <C> <C> <C>
<C> <C> <C>
Investment Grade Bond Fund 18.06% 86.51% 347.76%<F1>
13.56% 85.51% 347.76%<F1>
Government Securities Fund 10.45 66.04 140.36 <F2>
5.95 65.04 140.36 <F2>
Special Equities Fund 31.93 86.06 187.94 <F1>
26.93 85.06 187.94 <F1>
European Fund 22.95 40.48 64.67 <F3>
17.95 39.48 64.67 <F3>
<FN>
* Figures do not include the effect of the CDSC (maximum 4.50% for In-
vestment Grade Bond Fund and Government Securities Fund and 5.00% for
the other Funds).
** Figures include the effect of the applicable CDSC, if any.
<F1> Figures are for the ten-year period ending December 31, 1993.
<F2> The Fund commenced operations on March 20, 1984.
<F3> The Fund commenced operations on November 6, 1987.
</TABLE>
It is important to note that the yield and total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
The aggregate total returns of the Class D shares of the Funds were as
follows for the period indicated:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 29, 1993*
THROUGH
NAME OF FUND DECEMBER 31, 1993
<S> <C>
Investment Grade Bond Fund 10.35%
Government Securities Fund 7.48
Special Equities Fund (9.77)
European Fund **
<FN>
* The Funds commenced selling Class D shares on January 29, 1993. Class D
shares are sold at net asset value without any sales charge or CDSC.
** As of December 31, 1993, no publically offered Class D shares of the
Fund had been purchased, and therefore no meaningful performance infor-
mation is available.
</TABLE>
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its investments, and its operating ex-
penses. Consequently, any given performance quotation should not be con-
sidered representative of the Fund's performance for any specified period
in the future. Because performance will vary, it may not provide a basis
for comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time.
Comparative performance information may be used from time to time in ad-
vertising the Company's shares, including data from Lipper Analytical Ser-
vices, Inc., the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average and other publications.
TAXES
Set forth below is a summary of certain federal income tax considerations
generally affecting the Company and its shareholders. The summary is not
intended as a substitute for individual tax planning, and investors are
urged to consult their tax advisors with specific reference to their own
federal, state or local tax situations.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for federal tax
purposes.
The Company intends that each Fund qualify separately as a "regulated in-
vestment company" under the Code. A qualified Fund generally will not be
liable for federal income taxes to the extent that its taxable net invest-
ment income and net realized capital gains are distributed to its share-
holders, provided that each Fund distributes at least 90% of its net in-
vestment income.
Each Fund intends to accrue dividend income for federal income tax pur-
poses in accordance with the rules applicable to regulated investment com-
panies. In some cases, these rules may have the effect of accelerating (in
comparison to other recipients of the dividend) the time at which the div-
idend is taken into account by a Fund as taxable income.
Certain options, futures contracts and forward contracts in which the
Funds may invest are "section 1256 contracts." Gains or losses on section
1256 contracts generally are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"); however, foreign currency gains or
losses arising from certain section 1256 contracts may be treated as ordi-
nary income or loss. Also, section 1256 contracts held by a Fund at the
end of each taxable year are "marked-to-market" with the result that unre-
alized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as 60/40 gain or loss as ordinary income
or loss, as the case may be. These contracts also may be marked-to-market
for purposes of the 4% excise tax under rules prescribed in the Code.
Many of the hedging transactions undertaken by the Funds will result in
"straddles" for federal income tax purposes. Straddles are defined to in-
clude "offsetting positions" in actively traded personal property. It is
not entirely clear under what circumstances one investment made by a Fund
will be treated as offsetting another investment held by the Fund. In gen-
eral, positions are 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. The straddle rules may effect the character of gains (or
losses) realized on straddle positions. In addition, losses realized by a
Fund on straddle positions may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for
the taxable year in which losses are realized. The hedging transactions
may also increase the amount of gains from assets held less than three
months. As a result, the 30% limit on gains from certain assets held less
than three months, which applies to regulated investment companies, may
restrict a Fund in the amount of hedging transactions which it may under-
take. In addition, hedging transactions may increase the amount of short-
term capital gain realized by a Fund which is taxed as ordinary income
when distributed to the shareholders. The Fund may make one or more of the
elections available under the Code which are applicable to straddles. If a
Fund makes any of the elections, the amount, character and timing of the
recognition of gain or losses from the affected straddle positions will be
determined under rules that vary according to the election(s) made. Be-
cause only a few regulations implementing the straddle rules have been
promulgated, the consequences of straddle transactions to a Fund are not
entirely clear.
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. In view of each Fund's investment pol-
icy, it is expected that dividends from domestic corporations will consti-
tute a portion of the gross income of several of the Funds but not of oth-
ers. Therefore, it is expected that a portion of the income distributed by
the Special Equities Fund but not others (Investment Grade Bond Fund, Gov-
ernment Securities Fund and European Fund) may be eligible for the
dividends- received deduction for corporations.
Distributions of net realized capital gains designated by a Fund as capi-
tal gains dividends are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of a Fund have been held by a
shareholder. Distributions of capital gains, whether long or short-term,
are not eligible for the dividends-received deduction.
Dividends (including capital gain dividends) declared by a Fund in Octo-
ber, November or December of any calendar year to shareholders of record
on a date in such a month will be deemed to have been received by share-
holders on December 31 of that calendar year, provided that the dividend
is actually paid by the Fund during January of the following calendar
year.
All dividends are taxable to the shareholder whether reinvested in addi-
tional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for federal income
tax purposes in each share received equal to the net asset value of a
share of the Fund on the reinvestment date. Shareholders will be notified
annually as to federal tax status of distributions.
Under the Code, gains or losses attributable to fluctuations in currency
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a for-
eign currency and the time a Fund actually collects such receivables or
pays such liabilities, generally are treated as ordinary income or ordi-
nary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the
value of certain currency between the date of acquisition of the security
and the date of disposition also are treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of a Fund's investment com-
pany taxable income to be distributed to its shareholders as ordinary in-
come.
It is expected that certain dividends and interest received by the Fund
will be subject to foreign withholding taxes. So long as more than 50% in
value of a Fund's total assets at the close of a given taxable year con-
sists of stocks or securities of foreign corporations, the Fund may elect
to treat any foreign taxes paid or accrued by it as paid by its sharehold-
ers. Each Fund will notify shareholders in writing each year whether it
makes the election and the amount of foreign taxes it has elected to have
treated as paid by the shareholders. If a Fund makes the election, share-
holders will be required to include as income their proportionate share of
the amount of foreign taxes paid or accrued by the Fund and generally will
be entitled to claim either a credit or deduction (as an itemized deduc-
tion) for their share of the taxes in computing their federal income tax,
subject to limitations.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through elec-
tion is made, the source of the electing Fund's income will flow through
to its shareholders. With respect to a Fund, gains from the sales of secu-
rities generally will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign cur-
rency denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on
the foreign tax credit is applied separately to foreign source passive in-
come (as defined for purposes of the foreign tax credit), including the
foreign source passive income passed through by a Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate
share of the foreign tax paid or accrued by a Fund. A foreign tax credit
can be used to offset only 90% of the alternative minimum tax (as computed
under the Code for purposes of the limitation) imposed on corporations and
individuals. If a Fund is not eligible to make the election to "pass
through" to its shareholders its foreign taxes, the foreign taxes it pays
will reduce investment company taxable income and the distributions by
that Fund will be treated as United States source income.
The foregoing is only a general description of the foreign tax credit. Be-
cause application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advi-
sors.
Distributions by a Fund reduces the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's
cost basis, such distribution nevertheless generally would be taxable to
the shareholder as ordinary income or capital gains as described above,
even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider
the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forth-
coming distribution but the distribution generally would be taxable to
him.
Upon redemption, sale or exchange of his shares, a shareholder will real-
ize a taxable gain or loss depending upon his basis for his shares. Such
gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands. Such gain or loss generally
will be long-term or short-term depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
sale of shares of a Fund with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated
as long-term capital loss if such shares have been held by the shareholder
for six months or less. A gain realized on a redemption, sale or exchange
will not be affected by a reacquisition of shares. A loss realized on a
redemption, sale or exchange, however, will be disallowed to the extent
the shares disposed of are replaced (whether through reinvestment of dis-
tributions or otherwise) within a period of 61 days beginning 30 days be-
fore and ending 30 days after the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disal-
lowed loss.
For the purposes of computing the revised alternative minimum tax of 20%
for corporations, 75% of the excess of the adjusted current earnings (as
defined in the Code) over other alternative minimum taxable income is
treated as an adjustment item. Shareholders are advised to consult their
own tax advisors for details regarding the alternative minimum tax.
If a Fund purchases shares in certain foreign investment funds classified
under the Code as a "passive foreign investment company", the Fund may be
subject to federal income tax on a portion of an "excess distribution" and
gain from the disposition of such shares, even though such income may have
to be distributed as a taxable dividend by the Fund to its shareholders.
In addition, gains on the disposition of shares in a passive foreign in-
vestment company generally are treated as ordinary income even though the
shares are capital assets in the hands of the Company. Certain interest
charges may be imposed on either the Fund or its shareholders in respect
of any taxes arising from such distributions or gains. A Fund may be eli-
gible to elect to include in its gross income its share of earnings of a
passive foreign investment company on a current basis. Generally the elec-
tion would eliminate the interest charge and the ordinary income treatment
on the disposition of stock, but such an election may have the effect of
accelerating the recognition of income and gains by the Fund compared to a
fund that did not make the election. In addition, another election may be
available that would involve marking to market a Fund's passive foreign
investment company shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains
are treated as though they were realized. If this election were made, tax
at the Fund level under the passive foreign investment company rules would
generally be eliminated, but the Fund could, in limited circumstances,
incur nondeductible interest charges. Each Fund's intention to qualify an-
nually as a regulated investment company may limit its elections with re-
spect to shares of passive foreign investment companies.
Because the application of the passive foreign investment company rules
may affect, among other things, the character of gains, the amount of gain
or loss and the timing of the recognition of income with respect to pas-
sive foreign investment company shares, as well as subject a Fund itself
to tax on certain income from such shares, the amount that must be dis-
tributed to shareholders, and which will be taxed to shareholders as ordi-
nary income or long-term capital gain, may be increased or decreased sub-
stantially as compared to a fund that did not invest in passive foreign
investment companies.
If a shareholder (a) incurs a sales charge in acquiring shares of the Com-
pany, (b) disposes of those shares within 90 days and (c) acquires shares
in a mutual fund for which the otherwise applicable sales charge is re-
duced by reason of a reinvestment right (i.e., exchange privilege), the
original sales charge increases the shareholder's tax basis in the origi-
nal 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 dispo-
sition of the newly acquired shares made within 90 days of the subsequent
acquisition. This provision prevents a shareholder from immediately de-
ducting the sales charge by shifting his or her investment in a family of
mutual funds.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income,
or fails to certify that he or she has provided a correct taxpayer identi-
fication number and that he or she is not subject to such withholding,
then the shareholder may be subject to a 31% "backup withholding tax" with
respect to (a) any taxable dividends and distributions and (b) any pro-
ceeds of any redemption of Company shares. An individual's taxpayer iden-
tification 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.
The foregoing discussion relates only to federal income tax law as appli-
cable to U.S. persons. Distributions by the Funds also may be subject to
state, local and foreign taxes, and their treatment under state, local and
foreign income tax laws may differ from the federal income tax treatment.
The Government Securities Fund's dividends, to the extent they consist of
interest from obligations of the U.S. government and certain of its agen-
cies and instrumentalities, may be exempt from state and local income
taxes in some jurisdictions. The Company intends to advise shareholders of
the proportion of that Fund's dividends which are derived from such inter-
est. Shareholders should consult their tax advisors with respect to par-
ticular questions of federal, state and local taxation.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as the custodian of the
Company. Under its custody agreement with the Company, Boston Safe holds
the Company's fund securities and keeps all necessary accounts and
records. For its services, Boston Safe receives a monthly fee based upon
the month-end market value of securities held in custody and also receives
securities transaction charges. Boston Safe is authorized to establish
separate accounts for foreign securities owned by the Company to be held
with foreign branches of other domestic banks as well as with certain for-
eign banks and securities depositories. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation ("FDC"), is located at Ex-
change Place, Boston, Massachusetts 02109 and serves as the Company's
transfer agent. The outstanding shares of FDC are partially owned by Amer-
ican Express. Under the transfer agency agreement, TSSG maintains the
shareholder account records for the Company, handles certain communica-
tions between shareholders and the Company and distributes dividends and
distributions payable by the Company. For these services, TSSG receives a
monthly fee computed on the basis of the number of shareholder accounts it
maintains for the Company during the month and is reimbursed for out-of-
pocket expenses.
FINANCIAL STATEMENTS
The Annual Reports for each Fund for the fiscal year ended December 31,
1993 are incorporated herein by reference in their entirety.
APPENDIX
CORPORATE BONDS AND COMMERCIAL PAPER RATINGS
Corporate Bonds. Bonds rated Aa by Moody's are judged by Moody's to be of
high-quality by all standards. Together with bonds rated Aaa (Moody's
highest rating) they comprise what are generally known as high-grade
bonds. Aa bonds are rated lower than Aaa bonds because margins of protec-
tion may not be as large as those of Aaa bonds, or fluctuation of protec-
tive elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than those
applicable to Aaa securities. Bonds which are rated A by Moody's possess
many favorable investment attributes and are to be considered as upper
medium-grade obligations. Factors giving security to principal and inter-
est are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Moody's Baa rated bonds are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain pro-
tective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
Bonds rated AA by S&P are judged by S&P to be the high-grade obligations
and in the majority of instances differ only in small degree from issues
rated AAA (S&P highest rating). Bonds rated AAA are considered by S&P to
be the highest grade obligations and possess the ultimate degree of pro-
tection as to principal and interest. With AA bonds, as with AAA bonds,
prices move with the long-term money market. Bonds rated A by S&P have a
strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and
economic conditions.
Bonds rated BBB by S&P, or medium-grade category bonds, are borderline be-
tween definitely sound obligations and those where speculative elements
begin to predominate. These bonds have adequate asset coverage and nor-
mally are protected by satisfactory earnings. Their susceptibility to
changing conditions, particularly to depressions, necessitates constant
watching. These bonds generally are more responsive to business and trade
conditions than to interest rates. This group is the lowest which quali-
fies for commercial bank investment.
Commercial Paper. The Prime rating is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (a) evaluation of the management of the issuer;
(b) economic evaluation of the issuer's industry or industries and an ap-
praisal of speculative-type risks which may be inherent in certain areas;
(c) evaluation of the issuer's products in relation to competition and
customer acceptance; (d) liquidity; (e) amount and quality of long-term
debt; (f) trend of earnings over a period of ten years; (g) financial
strength of a parent company and the relationships which exist with the
issuer; and (h) recognition by management of obligations which may be
present or may arise as a result of public interest questions and prepara-
tions to meet such obligations. Issuers within the Prime category may be
given ratings 1, 2 or 3, depending on the relative strengths of these fac-
tors.
Commercial paper rated A by S&P has the following characteristics: (a) li-
quidity ratios are adequate to meet cash requirements; (b) long-term se-
nior debt rating should be A or better, although in some cases BBB credits
may be allowed if other factors outweigh the BBB; (c) the issuer should
have access to at least two additional channels of borrowing; (d) basic
earnings and cash flow should have an upward trend with allowances made
for unusual circumstances; and (e) typically the issuer's industry should
be well established and the issuer should have a strong position within
its industry, and the reliability and quality of management should be un-
questioned. Issuers rated A are further referred to by use of number 1, 2
and 3 to denote relative strength within this highest classification.
SUPPLEMENTARY DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS AND RELATED
OPTIONS
Characteristics of Futures Contracts. Currently, futures contracts can be
purchased and sold on such securities as U.S. Treasury bonds, U.S. Trea-
sury notes, GNMAs and U.S. Treasury bills. Unlike when the Fund purchases
or sells a security, no price is paid or received by the Fund upon the
purchase or sales of a futures contract. The Fund will initially be re-
quired to deposit with the custodian or the broker an amount of "initial
margin" of cash of U.S. Treasury bills. The nature of initial margin in
futures transactions is different from that of margin in security transac-
tions in that futures contract initial margin does not involve the borrow-
ing of funds by their customer to finance the transaction. Rather, the
initial margin is in the nature of a performance bond or good faith de-
posit on the contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been sat-
isfied. Subsequent payments, called maintenance margin, to and from the
broker, will be made on a daily basis as the price of the underlying debt
security fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marked-to-market." For
example, when the Fund has purchased a futures contract and the price of
the underlying debt security has risen, that position will have increased
in value and the Fund will receive from the broker a maintenance margin
payment equal to that increase in value. Conversely, when the Fund has
purchased a futures contract and the price of the underlying debt security
has declined, the position would be less valuable and the Fund would be
required to make a maintenance margin payment to the broker. At any time
prior to expiration of the futures contract, the Fund may elect to close
the position by taking an opposite position which will operate to termi-
nate the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by
or released to the Fund, and the Fund realizes a loss or a gain.
While futures contracts based on debt securities do provide for the deliv-
ery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, the futures contract is terminated by entering
into an offsetting transaction. An offsetting transaction for a futures
contract sale is effected by the Fund entering into a futures contract
purchase for the same aggregate amount of the specific type of financial
instrument and same delivery date. If the price in the sale exceeds the
price in the offsetting purchase, the Fund pays the difference and real-
izes the loss. Similarly, the closing out of a futures contract purchase
is effected by the Fund entering into a futures contract sale. If the off-
setting sale price exceeds the purchase price, the Fund realizes a gain,
and if the purchase price exceeds the offsetting price, the Fund realizes
a loss.
Risks of Transactions in Futures Contracts. There are several risks in
connection with the use of futures contracts by Government Securities Fund
as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures contracts and movements in
the price of the debt securities which are the subject of the hedge. The
price of the futures contract may move more than or less than the price of
the debt securities being hedged. If the price of the futures contract
moves less than the price of the securities which are the subject of the
hedge, the hedge will not be fully effective, but, if the price of the se-
curities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it has not hedged at all. If the
price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the movement in the price of
the futures contract. If the price of the futures contracts moves more
than the price of the security, the Fund will experience either a loss or
a gain on the future which will not be completely offset by movements in
the prices of the debt securities which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of debt
securities being hedged and movements in the prices of the futures con-
tracts, the Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of the securities being hedged if the his-
torical volatility of the prices of such securities has been greater than
the historical volatility of the futures contracts. Conversely, the Fund
may buy or sell fewer futures contracts if the historical volatility of
the price of the securities being hedged is less than the historical vola-
tility of the futures contracts. It is also possible that, where the Fund
has sold futures to hedge its portfolio against decline in the market, the
market may advance and the value of securities held in the Fund's portfo-
lio may decline. If this occurred, the Fund would lose money on the fu-
tures contracts and also experience a decline in value in its portfolio
securities. However, while this could occur for a very brief period or to
a very small degree, over time the value of a diversified portfolio will
tend to move in the same direction as the futures contracts.
Where futures are purchased to hedge against a possible increase in prices
of securities before the Fund is able to invest its cash (or cash equiva-
lents) in U.S. government securities (or options) in an orderly fashion,
it is possible that the market may decline instead; if the Fund then con-
cludes not to invest in U.S. government securities or options at that time
because of concern as to possible further market decline or for other rea-
sons, the Fund will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures contracts and
the portion of the portfolio being hedged, the market prices of futures
contracts may be affected by certain factors. First, all participants in
the futures market are subject to margin deposit and maintenance require-
ments. Rather than meeting additional margin deposit requirements, inves-
tors may close futures contracts though offsetting transactions which
could distort the normal relationship between the debt securities and fu-
tures markets; second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin require-
ments in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distor-
tions. Due to the possibility of price distortion in the futures market
and because of the imperfect correlation between movements in the debt se-
curities and movements in the prices of futures contracts, a correct fore-
cast of interest rate trends by the investment advisor may still not re-
sult in a successful hedging transaction over a very short time frame.
Positions in futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Al-
though Government Securities Fund intends to purchase or sell futures only
on exchanges or boards of trade where there appears to be an active sec-
ondary market, there is no assurance that a liquid secondary market on an
exchange or board of trade will exist for any particular contract or at
any particular time. In such event, it may not be possible to close a fu-
tures position, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation
margin. However, in the event that the futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the fu-
tures contracts can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset
losses on the futures contracts. However, as described above, there is no
guarantee that the price of the securities will, in fact, correlate with
the price movements of the futures contracts and thus provide an offset to
losses on futures contracts.
Successful use of futures contracts by the Fund is also subject to the in-
vestment adviser's ability to predict correctly movements in the direction
of interest rates and other factors affecting markets of debt securities.
For example, if the Fund has hedged against the possibility of an increase
in interest rates which would adversely affect debt securities held in its
portfolio and prices of such securities increase instead, the Fund will
lose part or all of the benefit of the increased value of its securities
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin re-
quirements. Such sale of securities may be, but will not necessarily be,
at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Characteristics of Options on Futures Contracts. As with options on debt
securities, the holder of an option may terminate his position by selling
an option of the same series. There is no guarantee that such closing
transactions can be effected. The Fund will be required to deposit initial
margin and maintenance margin with respect to put and call options on fu-
tures contracts written by it pursuant to brokers' requirements similar to
those applicable to interest rate futures contracts described above, and,
in addition, net option premiums received will be included as initial mar-
gin deposits.
In addition to the risks which apply to all options transactions, there
are several special risks relating to options on futures contracts. Trad-
ing in such options commenced in October 1982. The ability to establish
and close out positions on such options will be subject to the development
and maintenance of a liquid secondary market. It is not certain that this
market will develop. The Fund will not purchase options on futures con-
tracts on any exchange unless and until, in the investment advisor's opin-
ion, the market for such options had developed sufficiently that the risks
in connection with options on futures contracts are not greater than the
risks in connection with futures contracts. Compared to the use of futures
contracts, the purchase of options on futures contracts involves less po-
tential risk to the Fund because the maximum amount of risk is the premium
paid for the options (plus transaction costs). However, there may be cir-
cumstances when the use of an option on a futures contract would result in
a loss to the Fund when the use of a futures contract would not, such as
when there is no movement in the prices of debt securities. Writing an op-
tion on a futures contract involves risks similar to those arising in the
sale of futures contracts, as described above.
SMITH BARNEY SHEARSON
INVESTMENT FUNDS
Two World Trade Center
New York, New York 10048
Smith Barney Shearson
INVESTMENT FUNDS INC.
INVESTMENT GRADE BOND FUND
GOVERNMENT SECURITIES FUND
SPECIAL EQUITIES FUND
EUROPEAN FUND
STATEMENT OF
ADDITIONAL INFORMATION
JUNE 24, 1994
SMITH BARNEY
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.
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 December 31, 1993
and the Report for Independent Accountants dated February 2, 1994 are
incorporated by reference to the Definitive 30b-2 filed on March 1, 1994 as
Accession # 0000053798-94-000110
Included in Part C:
Consent of Independent Accountants is incorporated by
reference
(b) Exhibits
All references are to Registrant's Registration Statement on
Form N-1A (the "Registration Statement") as filed with the
Securities and Exchange Commission on October 2, 1981 (File
Nos. 2-74288 and 811-3275).
(1) (a) Articles of Restatement, dated February 12, 1993, to the Articles
of Incorporation are incorporated by reference to Post-Effective Amendment No.
29 to the registration statement, filed on March 3, 1993.
(1) (b) Articles of Amendment, dated May 21, 1993, to the Articles of
Incorporation are incorporated by reference to the Registrant's registration
statement filed on Form N-14 on September 2, 1993 File No. 33-50153.
(1) (c) Articles of Amendment dated July 30, 1993, to the Articles of
Incorporation are incorporated by reference to the Registrant's registration
statement filed on Form N-14 on September 2, 1993 File No. 33-50153.
(1) (d) Articles Supplementary, dated August 9, 1993, to the Articles of
Incorporation are incorporated by reference to the Registrant's registration
statement filed on Form N-14 on September 2, 1993 File No. 33-50153.
(2) Registrant's By-Laws, as amended on September 30, 1992, are incorporated
by reference to Post-Effective Amendment No. 30 to the Registration Statement,
filed on April 30, 1993.
(3) Inapplicable.
(4)(a) Registrant's form of stock certificate relating to Class A shares
is incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(4)(b) Registrant's form of stock certificate relating to Class B shares
is incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(4)(c) Registrant's form of stock certificate relating to Class D shares
is incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(5)(a) Investment Advisory Agreement dated July 30, 1993, between the
Registrant on behalf of Smith Barney Shearson Investment Grade Bond Fund,
Smith Barney Shearson Government Securities Fund and Smith Barney Shearson
Special Equities Fund and Greenwich Street Advisors Division of Mutual
Management Corporation is incorporated by reference to the registration
statement filed on Form N-14 on September 2, 1993. File No. 33-50153.
(5)(b) Investment Advisory Agreement dated April 8, 1994, between the
Registrant on behalf of Smith Barney Shearson European Fund and Smith, Barney
Advisers, Inc. is filed herewith.
(6) Distribution Agreement, dated July 30, 1993, between the Registrant and
Smith Barney Shearson Inc. is incorporated by reference to the registration
statement filed on Form N-14 on September 2, 1993. File No. 33-50153.
(7) Inapplicable
(8) Custodian Agreement with Boston Safe Deposit and Trust Company is
incorporated by reference to Post-Effective Amendment No. 20 to the
Registration Statement, filed on September 6, 1988.
9(a) Administration Agreement dated May 21, 1993, between the Registrant
and The Boston Company Advisors, Inc. is incorporated by reference to the
registration statement filed on Form N-14 on September 2, 1993. File No. 33-
50153
(9)(b) Transfer Agency and Registrar Agreement dated August 5, 1993 with
The Shareholder Services Group, Inc. is incorporated by reference to Post-
Effective Amendment No. 31 to the Registration Statement, filed on December
22, 1993.
(10) Opinion of Counsel relating to legality of shares is incorporated by
reference to Post-Effective Amendment No. 31 to the Registration Statement,
filed on December 22, 1993.
(11) Consent of Independent Accountants is incorporated by reference to Post-
Effective Amendment No. 33 to the Registration Statement, filed on March 1,
1994, 1994.
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Services and Distribution Plan dated July 30, 1993 between the
Registrant and Smith Barney Shearson Inc. is incorporated by reference to the
registration statement filed on Form N-14 on September 2, 1993. File No. 33-
50153.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement filed on May 1, 1989.
(17) Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 31 to the Registration Statement, filed on December 22,
1993.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders as of June 3,1994
Common Stock par value Class A Class B Class D
$.001 per share
FUND
Special Equities Fund 9,041 25,929 18
Investment Grade Bond Fund 819 28,832 15
Government Securities Fund 534 46,667 12
European Fund 379 5,742 1
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1 to the registration statement filed on Form N-14 on October 8,
1993. File No. 33-50153.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Greenwich Street Advisors
Greenwich Street Advisors, through its predecessors, has been in the
investment counseling business since 1934 and is a division of Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is in
turn a wholly owned subsidiary of The Travelers Inc. ("Travelers") (formerly
known as Primerica Corporation).
The list required by this Item 28 of officers and directors of MMC and
Greenwich Street Advisors, 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 MMC on behalf of Greenwich
Street Advisors pursuant to the Investment Advisers Act of 1940 (the "Advisers
Act") (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc. (formerly
Smith Barney, Harris Upham & Co. Incorporated) acquired the domestic retail
brokerage and asset management business of Shearson Lehman Brothers, which
included the business of the Registrant's prior investment adviser. Shearson
Lehman Brothers was a wholly owned subsidiary of Shearson Lehman Brothers
Holdings Inc. ("Shearson Holdings"). All of the issued and outstanding common
stock of Shearson Holdings (representing 92% of the voting stock) was held by
American Express Company. Information as to any past business vocation or
employment of a substantial nature engaged in by officers and directors of
Shearson Lehman Advisors can be located in Schedules A and D of FORM ADV filed
by Shearson Lehman Brothers on behalf of Shearson Lehman Advisors prior to
July 30, 1993. (SEC FILE NO. 801-3701).
8/23/93
Item 28. Business and Other Connections of Investment Adviser
Investment Adviser - - Smith, Barney Advisers, Inc.
Smith, Barney Advisers, Inc. ("SBA") was incorporated in December 1968
under the laws of the State of Delaware. SBA is a wholly owned
subsidiary of Holdings, which in turn is a wholly owned
subsidiary of Travelers. SBA is registered as an investment adviser
under the Investment Advisers
Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of SBA
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 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 Shearson Managed Municipals Fund Inc., Smith
Barney Shearson New York Municipals Fund Inc., Smith Barney Shearson
California Municipals Fund Inc., Smith Barney Shearson Massachusetts
Municipals Fund, Smith Barney Shearson Global Opportunities Fund, Smith Barney
Shearson Aggressive Growth Fund Inc., Smith Barney Shearson Appreciation Fund
Inc., Smith Barney Shearson Worldwide Prime Assets Fund, Smith Barney Shearson
Short-Term World Income Fund, Smith Barney Shearson Principal Return Fund,
Smith Barney Shearson Municipal Money Market Fund Inc., Smith Barney Shearson
Daily Dividend Fund Inc., Smith Barney Shearson Government and Agencies Fund
Inc., Smith Barney Shearson Managed Governments Fund Inc., Smith Barney
Shearson New York Municipal Money Market Fund, Smith Barney Shearson
California Municipal Money Market Fund, Smith Barney Shearson Income Funds,
Smith Barney Shearson Equity Funds, Smith Barney Shearson Investment Funds
Inc., Smith Barney Shearson Precious Metals and Minerals Fund Inc., Smith
Barney Shearson Telecommunications Trust, Smith Barney Shearson Arizona
Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals Fund Inc.,
The USA High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., The
Advisors Fund L.P., Smith Barney Shearson Fundamental Value Fund Inc., Smith
Barney Shearson Series Fund, Consulting Group Capital Markets Funds, Smith
Barney Shearson Income Trust, Smith Barney Shearson FMA R Trust, Smith Barney
Shearson Adjustable Rate Government Income Fund, Smith Barney Shearson Florida
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Equity Funds, Inc.,
Smith Barney Muni Funds, Smith Barney World Funds, Inc., Smith Barney Money
Funds, Inc., Smith Barney Tax Free Money Fund, Inc., Smith Barney Variable
Account Funds, Smith Barney U.S. Dollar Reserve Fund (Cayman), Worldwide
Special Fund, N.V., Worldwide Securities Limited, (Bermuda), and various
series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings, which in
turn is a wholly owned subsidiary of Travelers. 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) Smith Barney Shearson Investment Funds Inc.
Two World Trade Center
New York, New York 10048
(2) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(3) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(4) Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(5) Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10022
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant hereby undertakes to furnish to each person to whom a
prospectus of any series of the Registrant is delivered a copy of the
Registrant's latest annual report, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as
amended, the Registrant 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 23rd day of
June, 1994.
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.,
Registrant
By: /s/Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
______________________________________________________________________________
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature: Title: Date:
/s/Stephen J. Treadway President June 23,
1994
Stephen J. Treadway
/s/Richard P. Roelofs Executive Vice-President
June 23, 1994
Richard P. Roelofs
/s/Lewis E. Daidone Treasurer (Chief Financial
June 23, 1994
Lewis E. Daidone and Accounting Officer)
/s/Heath B. McLendon Chairman of the Board June 23,
1994
Heath B. McLendon (Chief Executive Officer)
/s/Alger B. Chapman * Director June
23, 1994
Alger B. Chapman
/s/Dwight B. Crane * Director June
23, 1994
Dwight B. Crane
/s/Frank G. Hubbard * Director June
23, 1994
Frank G. Hubbard
/s/Allan R. Johnson * Director June
23, 1994
Allan R. Johnson
/s/John F. White * Director June 23,
1994
John F. White
* Signed by Heath B. McLendon their duly authorized attorney-in-fact, pursuant
to power of attornye dated August 23, 1993.
/s/Heath B. McLendon
Heath B. McLendon
SLIV/PEAS/PEA#36
INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.
April 8, 1994
Smith, Barney Advisers, Inc.
388 Greenwich Street
New York, NY 10013
Dear Sirs:
Smith Barney Shearson Investment Funds Inc. (the "Company"), a
corporation organized under the laws of Maryland, confirms its agreement with
Smith, Barney Advisers Inc. (the "Adviser"), on behalf of the Smith Barney
Shearson European Fund (the "Fund"), as follows:
1. Investment Description; Appointment
The Company desires to employ the capital of the Portfolio by
investing and reinvesting in investments of the kind and in accordance with
the investment objective, policies and limitations of such Fund as specified
in the Company's Articles of Incorporation, as amended from time to time (the
"Charter Document"), in the prospectus (the "Prospectus") and the statement of
additional information (the "Statement") filed with the Securities and
Exchange Commission as part of the Company's Registration Statement on Form N-
1A, as amended from time to time, and in the manner and to the extent as may
from time to time be approved by the Board of Directors of the Company
("Board"). Copies of the Prospectus, the Statement and the Charter Document
have been or will be submitted to the Adviser. The Company agrees to provide
copies of all amendments to the Prospectus, the Statement and the Charter
Document to the Adviser on an on-going basis. The Company desires to employ
and hereby appoints the Adviser to act as the investment adviser to the Fund.
The Adviser accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Company, the Adviser will (a) manage the Company's holdings in accordance
with the Fund's investment objective and policies as stated in the Charter
Document, the Prospectus and the Statement; (b) make investment decisions for
the Fund; (c) place purchase and sale orders for the Fund; (d) employ
professional Fund managers and securities analysts who provide research
services to the Fund. In providing those services, the Adviser will conduct a
continual program of investment, evaluation and, if appropriate, sale and
reinvestment of the Fund's assets. In addition, the Adviser will furnish the
Fund with whatever statistical information the Fund may reasonably request
with respect to the securities that the Fund may hold or contemplate
purchasing.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf
of the Fund, the Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In selecting brokers or dealers to execute a particular
transaction, the Adviser is authorized to consider the brokerage and research
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934), provided to the Fund and/or other accounts over which
the Adviser or its affiliates exercise investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments
materially affecting the Fund's holdings, and will, on its own initiative,
furnish the Company from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 above. The Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Adviser against any liability to the Company or to its shareholders to which
the Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or by
reason of the Adviser's reckless disregard of its obligations and duties under
this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Adviser on the first business day of each
month a fee for the previous month at the annual rate of 0.70% of the Fund's
average daily net assets. The fee for the period from the Effective Date
(defined below) of the Agreement to the end of the month during which the
Effective Date occurs shall be prorated according to the proportion that such
period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that month shall
be prorated according to the proportion that such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to the Adviser, the
value of the Fund's net assets shall be computed at the times and in the
manner specified in the Prospectus and/or the Statement.
7. Expenses
The Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear certain
other expenses to be incurred in its operation, including, but not limited to,
investment advisory and administration fees; fees for necessary professional
and brokerage services; fees for any pricing service; the costs of regulatory
compliance; and costs associated with maintaining the Company's legal
existence and shareholder relations.
8. Reduction of Fees or Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Company's administration
agreement, but excluding interest, taxes, brokerage and extraordinary
expenses) exceed the expense limitation of any state having jurisdiction over
the Fund, the Adviser will reduce its fees or reimburse the Fund for such
excess expense in the same proportion as its advisory fee bears to the Fund's
combined fees for investment advice and administration. A fee reduction
pursuant to this paragraph 8, if any, will be estimated, reconciled and, in
case of reimbursement, paid on a monthly basis.
9. Services to Other Companies or Accounts
The Fund understands that the Adviser now acts, will continue to
act and may act in the future as investment adviser to fiduciary and other
managed accounts, and as investment adviser to other investment companies.
The Fund has no objection to the Adviser's so acting, provided that whenever
the Fund and one or more other investment companies or Funds advised by the
Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula believed
to be equitable to each company or Fund. The Fund recognizes that in some
cases this procedure may adversely affect the size of the position obtainable
for the Fund. In addition, the Fund understands that the persons employed by
the Adviser to assist in the performance of the Adviser's duties under this
Agreement will not devote their full time to such service and nothing
contained in this Agreement shall be deemed to limit or restrict the right of
the Adviser or any affiliate of the Adviser to engage in and devote time and
attention to other businesses or to render services of whatever kind or
nature.
10. Term of Agreement
This Agreement shall become effective as of ___________________,
1994 and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of the Company or (ii) a vote of a "majority" (as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding voting securities, provided that in
either event the continuance is also approved by a majority of the Board who
are not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable, without penalty, on 60
days' written notice by the Board of Directors of the Company or by vote of
holders of a majority of the Fund's shares, or upon 90 days' written notice,
by the Adviser. This Agreement will also terminate automatically in the event
of its assignment (as defined in the 1940 Act and the rules thereunder).
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Agreed and Accepted:
SMITH, BARNEY ADVISERS, INC.
By: /s/ Christina Sydor
Name: Christina Sydor
Title:
sliv\agmts\eurinadv
- -4-
