As filed with the Securities and Exchange
Commission
on March 9, 1995
Registration No.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [
] Post-Effective Amendment No.
SMITH BARNEY INVESTMENT FUNDS, INC.
(Exact name of Registrant as specified in Charter)
Area Code and Telephone Number: (212) 723-9218
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip
Code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street New York, New York 10013
(22nd floor)
(Name and address of agent for service)
copies to:
Burton M. Leibert, Esq. John A. Dudley, Esq.
Willkie Farr & Gallagher Sullivan & Worcester
One Citicorp Center Blake Bldg, Suite 1000
153 East 53rd Street Washington, DC 20036
New York, NY 10022
Approximate date of proposed public offering: As soon
as possible after the effective date of this
Registration Statement.
Registrant has registered an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended; accordingly, no fee is
payable herewith. Registrant's Rule 24f-2 Notice for the
fiscal period ended December 31, 1994 was filed with the
Securities and Exchange Commission on
February 27, 1995.
Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further
amendment which specifically states that this
Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement shall become
effective on such date as the Commission, action
pursuant to said Section 8(a), may determine.
SMITH BARNEY GROWTH OPPORTUNITY FUND
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages
and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INVESTMENT FUNDS, INC.
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act
of 1933
Prospectus/Proxy
Part A Item No. and Caption
Statement Caption
Item 1. Beginning of Registration
Cover Page; Cross Reference
Statement and Outside Front
Sheet
Cover Page of Prospectus
Item 2. Beginning and Outside Back
Table of Contents
Cover Page of Prospectus
Item 3. Synopsis Information and
Summary; Risk Factors
Risk Factors
Item 4. Information About the Transaction
Summary: Reasons for the Reorganization;
Information About
the Reorganization;
Comparative Information on Shareholders'
Rights; Voting
Information; Exhibit A
(Agreement and Plan of Reorganization)
Item 5. Information About the Registrant
Cover Page; Summary; Additional Materials;
Information About the Reorganization; Information about
the Smith Barney Growth Opportunity Fund; Comparison of
Investment Objectives and Policies; Comparative
Information on Shareholders' Rights; Additional
Information About the Smith Barney Growth Opportunity
Fund and the Growth Opportunity Fund; Prospectus of the
Smith Barney Growth Opportunity Fund dated April __,
1995
Item 6. Information About the
Summary; Additional Materials;
Company Being Acquired
Information About the Reorganization;
Information about the
Growth
Opportunity Fund; Comparison
of
Investment Objectives and Policies;
Comparative Information on Shareholders'
Rights;
Additional Information About the
Smith
Barney Growth Opportunity Fund
and the
Growth Opportunity Fund
Item 7. Voting Information
Summary; Information About the
Reorganization; Comparative Information
on
Shareholders' Rights; Voting
Information
Item 8. Interest of Certain Persons
Not Applicable
and Experts
Item 9. Additional Information
Not Applicable
Required for Reoffering By
Persons Deemed to be Underwriters
Statement of Additional
Part B Item No. and Caption
Information Caption
Item 10. Cover Page Cover
Page
Item 11. Table of Contents
Not Applicable
Item 12. Additional Information
Cover Page; Statement of Additional
About the Registrant
Information of Smith Barney Investment
Funds,
Inc. dated April --, 1995
Item 13. Additional Information Cover
Page; Statement of Additional
About the Company Being
Information of the Growth Opportunity Fund
Acquired dated
February 21, 1995
Item 14. Financial Statements
Annual Report of Smith Barney Investment
Funds, Inc.; Annual
Report of Growth
Opportunity Fund; Semi Annual Report
of
Growth Opportunity Fund; Pro forma
Financial Statements
Part C Item No. and Caption
Other Information Caption
Item 15. Indemnification
Incorporated by reference to Part A
caption
"Comparative Information on
Shareholders' Rights - Liability of
Directors"
Item 16. Exhibits Exhibits
Item 17. Undertakings
Undertakings
A SPECIAL NOTICE TO SHAREHOLDERS OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
3100 Breckenridge Boulevard
Duluth, Georgia 30199
May --, 1995
Dear Shareholder,
The Board of Directors of the Common Sense
Trust (the "Company"), has recently reviewed and
unanimously endorsed a proposal for the reorganization
of the Growth Opportunity Fund (the "Acquired Fund"), a
separate fund of the Company, which it judges to be in
the best interests of the Acquired Fund shareholders.
Under the terms of the proposal, the Smith Barney
Growth Opportunity Fund (the "Acquiring Fund"), a
separate series of Smith Barney Investment Funds Inc.,
would acquire all or substantially all of the assets and
liabilities of the Acquired Fund. After the transaction,
the Acquired Fund would be dissolved and you would
become a shareholder of the Acquiring Fund, having
received shares with an aggregate net asset value
equivalent to the aggregate net asset value of your
Acquired Fund investment at the time of the transaction.
The transaction would, in the opinion of counsel, be
free from Federal income taxes to you, the Acquired Fund
and the Acquiring Fund, and it is intended that the
combined fund will continue to be managed by the same
portfolio manager who currently manages the Acquired
Fund.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS
IMPORTANT
The Board of Directors of the Company are
recommending that shareholders approve the reorganization due,
in part, to the fact that the investment advisory, distribution and
shareholder services would be provided to the Fund by entities
affiliated with Smith Barney. We
have therefore called a Special Meeting of Shareholders
to be held on June 23, 1995 to consider this
transaction. We strongly urge your participation by
asking you to review, complete and return your proxy
promptly.
Detailed information about the proposed
transactions is described in the enclosed proxy
statement. On behalf of the Board, I thank you for your
participation as a shareholder and urge you to please
exercise your right to vote by completing, dating and
signing the enclosed proxy card. A self-addressed,
postage-paid envelope has been enclosed for your
convenience. If you sign and date your proxy card, but
do not provide voting instructions, your shares will be
voted FOR the proposal.
If you have any questions regarding the proposed
transaction, please feel free to call your Financial
Consultant.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS
BE RECEIVED PROMPTLY.
Sincerely,
Don G. Powell
Chairman of the Board of
Common Sense Trust
COMMON SENSE TRUST-
GROWTH OPPORTUNITY FUND
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On June 23, 1995
___________________
Notice is hereby given that a Special
Meeting of Shareholders (the "Meeting") of Common Sense
Trust - Growth Opportunity Fund (the
"Acquiring Fund"), will be held at [ ] on June
23, 1995, at [ ] for the following purposes:
1. To consider and act upon the Agreement
and Plan of Reorganization (the "Plan") dated as of
March --, 1995 providing for (i) the acquisition of all
or substantially all of the assets of the Growth
Opportunity Fund, a separate series of the Common Sense
Trust (the "Acquired Fund"), by the Growth Opportunity
Fund, a separate series of Smith Barney Investment
Funds, Inc. (the "Acquiring Fund"), in exchange for
Class A and Class B shares of the Acquiring Fund and the
assumption by the Acquiring Fund of certain liabilities
of the Acquired Fund, (ii) the distribution of such
shares of the Acquiring Fund to shareholders of the
Acquired Fund in liquidation of the Acquired Fund and
(iii) the subsequent termination of the Acquired Fund.
2. To transact any other business which
may properly come before the Meeting or any adjournment
thereof.
The Trustees of the Common Sense Trust have
fixed the close of business on April 26, 1995, as the
record date for the determination of shareholders of the
Acquired Fund entitled to notice of and to vote at this
Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE
RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND IN
PERSON ARE URGED TO SIGN AND RETURN WITHOUT DELAY THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES
NO POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AT
THE MEETING. PROXIES MAY BE REVOKED AT ANY TIME BEFORE
THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY BY GIVING WRITTEN NOTICE
OF REVOCATION TO THE ACQUIRED FUND AT ANY TIME BEFORE
THE PROXY IS EXERCISED OR BY VOTING IN PERSON AT THE
MEETING.
By order of the Trustees
Nori L. Gabert
Secretary
May --, 1995
YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER
SOLICITATION.
PROSPECTUS/PROXY STATEMENT DATED MAY __, 1995
Acquisition of the Assets Of
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
3100 Breckenridge Boulevard
Duluth, Georgia 30199
(800) ___-____
By And In Exchange For Shares Of
SMITH BARNEY INVESTMENT FUNDS, INC.-- GROWTH
OPPORTUNITY FUND
388 Greenwich Street
New York, New York 10013
(800) ___-____
This Prospectus/Proxy Statement,
which should be retained for future reference, sets
forth concisely the information about the Smith Barney
Growth Opportunity Fund that a prospective investor
should know before investing. A Statement of Additional
Information dated May --, 1995 relating to this
Prospectus/Proxy Statement and the Reorganization, has
been filed with the SEC and is incorporated by reference
into this Prospectus/Proxy Statement. A copy of such
Statement of Additional Information is available upon
request and without charge by calling or writing the
Smith Barney Growth Opportunity Fund at the telephone
number or address listed on the cover page of this
Prospectus/Proxy Statement.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus/Proxy Statement is
being furnished to shareholders of the Growth Opportunity Fund
(the "Acquired Fund"), a separate series of
the Common Sense Trust (the "Trust"), in
connection with a proposed plan of reorganization (the
"Plan"), to be submitted to shareholders for
consideration at a Special Meeting of Shareholders to be
held on June 23, 1995, at [ ], New York City time, at
the offices of the Common Sense Trust, located at [
] and any adjournments thereof (collectively, the
"Meeting").
The Plan provides for all or
substantially all of the assets of the Acquired Fund to
be acquired by the Smith Barney Growth Opportunity Fund
(the "Acquiring Fund"),
a separate series of Smith Barney Investment Funds Inc.
in exchange for shares of the
Acquiring Fund and the assumption by the Acquiring Fund
of certain liabilities of the Acquired Fund (hereinafter
referred to as the "Reorganization"). (The Acquired Fund
and the Acquiring Fund are herein referred to
individually as a "Fund" and collectively as the
"Funds"). Following the Reorganization, shares of the
Acquiring Fund will be distributed to shareholders of
the Acquired Fund in liquidation of the Acquired Fund
and the Acquired Fund will be terminated. As a result of
the proposed Reorganization, each shareholder of the
Acquired Fund will receive that number of shares of the
Acquiring Fund having an aggregate net asset value equal
to the aggregate net asset value of such shareholder's
shares of the Acquired Fund. Holders of Class A shares
in the Acquired Fund will receive Class A shares of the
Acquiring Fund, and no sales charge will be imposed on
the Class A shares of the Acquiring Fund received by the
Acquired Fund Class A shareholders. Holders of Class B
shares in the Acquired Fund will receive Class B shares
of the Acquiring Fund; any contingent deferred sales
charge ("CDSC") which is applicable to a shareholder's
investment will continue to apply, and, in calculating
the applicable CDSC payable upon the subsequent
redemption of shares of the Acquiring Fund, the period
during which an Acquired Fund shareholder held shares of
the Acquired Fund will be counted.
The Acquiring Fund is an open-
end, management investment company whose investment
objective is the same as the Acquired Fund, which is to
seek capital appreciation through investments in
securities believed to have above average potential for
capital appreciation. Smith Barney Mutual Funds
Management Inc. ("SBMFM") serves as investment adviser
to the Acquiring Fund. Smith Barney Strategy Advisers
Inc., a division of SBMFM ("Strategy Advisers") serves
as investment adviser to the Acquired Fund. SBMFM is a
wholly-owned subsidiary of Smith Barney Holdings Inc.
("Holdings") which is, in turn, a wholly-owned
subsidiary of The Travelers Inc. ("Travelers").
The investment policies of the
Acquiring Fund are identical to those of the Acquired
Fund, except for certain differences which are described
under "Comparison of Investment Objectives and Policies"
in this Prospectus/Proxy Statement.
Certain relevant documents listed below, which
have been filed with the Securities and Exchange
Commission ("SEC"), are incorporated by reference. A
copy of such documents and the Acquired Fund Prospectus
referred to below are available upon request and without
charge by calling or writing the Acquired Fund at the
telephone number or address listed on the cover page of
this Prospectus/Proxy Statement.
1. The Prospectus dated April
- --, 1995 of Smith Barney Investment Funds, Inc. --
Growth Opportunity Fund is incorporated in its entirety
by reference and a copy is included herewith.
2. The Prospectus dated
February 21, 1995, of the Acquired Fund is incorporated
in its entirety by reference.
Also accompanying this
Prospectus/Proxy Statement as Exhibit A is a copy of the
Plan.
TABLE OF CONTENTS
Page
Additional Materials 1
Fee Tables
Summary 1
Risk Factors 5
Reasons for the Reorganization 6
Information about the Reorganization
6
Information about the Acquiring Fund
11
Information about the Acquired Fund 14
Comparison of Investment Objectives and
Policies 19
Comparative Information on Shareholders'
Rights 22
Additional Information About the Acquiring
Fund and
the Acquired Fund 24
Other Business 25
Voting Information 25
Financial Statements and Experts 26
Legal Matters 27
Exhibit A: Agreement and Plan of
Reorganization A-1
ADDITIONAL MATERIALS
The following additional materials,
which have been incorporated by reference into the
Statement of Additional Information dated May --, 1995
relating to this Prospectus/Proxy Statement and the
Reorganization, will be sent to all shareholders
requesting a copy of such Statement of Additional
Information.
1. Statement of Additional Information of
Smith Barney Investment Funds, Inc. dated April --, 1995.
2. Statement of Additional Information of
Common Sense Trust - Growth Opportunity Fund dated
April __, 1995.
3. Annual Report of Common Sense
Trust - Growth Opportunity Fund dated October 31, 1994.
FEE TABLE
Following are tables showing the current costs and
expenses of the Acquiring Fund and the Acquired Fund and
the Pro Forma costs and expenses expected to be incurred
by the Acquiring Fund after giving effect to the
Reorganization, each based on the maximum sales charge or
maximum CDSC that may be incurred at the time of purchase
or redemption:
CLASS A SHARES
Acquiring
Acquired
Fund
Fund Pro Forma
Shareholder Transaction Expenses
Maximum sales charge imposed
on purchases 5.00%
5.50% ----%
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of None*
None* None*
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 1.00%
1.00% 1.00%
12b-1 fees 0.25
0.25 0.25
Other expenses** ----
---- ----
Total Portfolio Operating ----%
----% ----%
Expenses
* Purchases of Class A shares, which when combined with current holdings
of Class A
shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made
at net asset value with no sales charge, but will be subject to a CDSC
of 1.00% on
redemptions made within 12 months.
** These expenses for Class A shares of the Acquiring Fund are based
on estimated
amounts for the fiscal year ending [ ], 1995; for the Acquired
Fund on actual
amounts, for the fiscal year ended October 31, 1994; and for the Pro
Forma numbers, on
estimated amounts for the fiscal year ending [ ], 1995.
CLASS B SHARES Acquiring
Acquired
Fund
Fund Pro Forma
Shareholder Transaction Expenses
Maximum sales charge imposed
on purchases None
None None
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of 5.00%
5.00% 5.00%
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 1.00%
1.00% 1.00%
12b-1 fees* 1.00
1.00 1.00
Other expenses** ----
---- ----
Total Portfolio Operating ----%
----% ----%
Expenses
______________________
* Upon conversion of Class B shares to Class A shares, such shares will
no longer be
subject to a distribution fee, but will continue to be subject to a
0.25% service fee.
** These expenses for Class B shares of the Acquiring Fund are based
on estimated
amounts for the fiscal year ending [ ], 1995; for the Acquired
Fund based on actual
amounts, for the fiscal year ended October 31, 1994; and for the Pro
Forma numbers, on
estimated amounts for the fiscal year ending [ ], 1995.
Examples
The following examples are intended to assist an
investor in understanding the various costs that an
investor will bear directly or indirectly. The examples
assume payment of operating expenses at the levels set
forth in the tables above.
1 Year
3 Years 5 Years 10 Years*
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
Class A
Acquiring Fund $-- $--
$--- $---
Acquired Fund
Pro Forma
Class B
Acquiring Fund $-- $--
$--- $---
Acquired Fund
Pro Forma
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
1 Year
3 Years 5 Years 10 Years*
Class A
Acquiring Fund $-- $--
$--- $---
Acquired Fund
Pro Forma
Class B
Acquiring Fund $-- $--
$--- $---
Acquired Fund
Pro Forma
________________________
* Ten-year figures assume conversion of Class B shares to Class A shares
at the end
of the eighth year following the date of purchase.
The examples also provide a means for an investor to
compare expense levels of funds with different fee
structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a 5.00%
annual return assumption. However, the Fund's actual
return will vary and may be greater or less than 5.00%.
These examples should not be considered representations of
past or future expenses and actual expenses may be greater
or less than those shown.
SUMMARY
This summary is qualified in its
entirety by reference to the additional information
contained elsewhere in this Prospectus/Proxy Statement,
the Prospectus of the Acquiring Fund dated April --, 1995,
the Statement of Additional Information of Smith
Barney Investment Funds, Inc. dated April --, 1995, the
Prospectus of the Acquired Fund dated February 21, 1995,
the Statement of Additional Information of the Acquired
Fund dated February 21, 1995 and the Plan, a copy of which
is attached to this Prospectus/Proxy Statement as Exhibit
A.
Proposed Reorganization. The Plan
provides for the transfer of all or substantially all of
the assets of the Acquired Fund in exchange for shares of
the Acquiring Fund and the assumption by the Acquiring
Fund of certain liabilities of the Acquired Fund. The Plan
also calls for the distribution of shares of the Acquiring
Fund to the Acquired Fund shareholders in liquidation of
the Acquired Fund. (The foregoing proposed transaction is
referred to in this Prospectus/Proxy Statement as the
"Reorganization"). As a result of the Reorganization, each
shareholder of the Acquired Fund will become the owner of
that number of full and fractional shares of the Acquiring
Fund having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of
the Acquired Fund as of the close of business on the date
that the Acquired Fund's assets are exchanged for shares
of the Acquiring Fund. (Shareholders of Class A and Class
B shares of the Acquired Fund will receive Class A and
Class B shares, respectively, of the Acquiring Fund). See
"Information About the Reorganization."
For the reasons set forth below under
"Reasons for the Reorganization," the Trustees of the
Trust, including all of the "non-interested"
Trustees, as that term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), have
unanimously concluded that the Reorganization would be in
the best interests of the shareholders of the Acquired
Fund and that the interests of the Acquired Fund's
existing shareholders would not be diluted as a result of
the transaction contemplated by the Reorganization, and
therefore has submitted the Plan for approval by the
Acquired Fund's shareholders. The Trustees of the Trust
recommend approval of the Plan effecting the
Reorganization.
The Board of Directors of the Smith
Barney Investment Funds, Inc. ("Smith Barney Investment
Funds") has also approved the Reorganization.
Approval of the Reorganization will
require the affirmative vote of a majority of the
outstanding shares of the Acquired Fund. See "Voting
Information."
Tax Consequences. Prior to completion
of the Reorganization, the Acquired Fund will have
received from counsel an opinion that, upon the
Reorganization and the transfer of the assets of the
Acquired Fund, no gain or loss will be recognized by the
Acquired Fund or its shareholders for Federal income tax
purposes. The holding period and tax basis of shares of
the Acquiring Fund that are received by each Acquired Fund
shareholder will be the same as the holding period and tax
basis of the shares of the Acquired Fund previously held
by such shareholder. In addition, the holding period and
tax basis of the assets of the Acquired Fund in the hands
of the Acquiring Fund as a result of the Reorganization
will be the same as in the hands of the Acquired Fund
immediately prior to the Reorganization.
Investment Objectives, Policies and
Restrictions. The Acquiring Fund has the same investment
objective as the Acquired Fund, which is to seek capital
appreciation through investments in securities believed to
have above average potential for capital appreciation.
Although the investment objectives are
identical and the investment policies of the Acquiring
Fund and the Acquired Fund are substantially similar,
shareholders of the Acquired Fund should consider certain
differences in such policies. See " Information About the
Acquiring Fund", "Information About the Acquired Fund" and
"Comparison of Investment Objectives and Policies."
Purchase and Redemption Procedures.
Purchase of shares of the Acquiring Fund and the Acquired
Fund may be made through the [PFS Distributors] at their
respective public offering prices (net asset value next
determined plus any applicable sales charge). Class A
shares of the Acquiring Fund are sold subject to a maximum
initial sales charge of 5.00% of the public offering
price. Class A shares of the Acquired Fund are sold
subject to a maximum in initial sales charge of 5.50% of
the offering price. Class B shares of both Funds are sold
without an initial sales charge but are subject to higher
ongoing expenses than Class A shares and are subject to a
CDSC payable upon certain redemptions.
Class A shares of both the Acquiring
Fund and the Acquired Fund may be redeemed at their
respective net asset values per share next determined
without charge. Class B shares of the Acquiring Fund may
be redeemed at their net asset value per share, subject to
a maximum CDSC of 5.00% of the lower of original cost or
redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. Class B shares of the
Acquired Fund may be redeemed at their net asset value per
shares, subject to a maximum CDSC of 5.00% of the lesser
of the cost of the shares being redeemed or the then
current market value, declining by 1.00% in the second and
third year after purchase, 0.5% in the fourth year and
1.00% in the fifth year to zero in the sixth year after
purchase.
Shares of the Acquired Fund may be
redeemed by sending a written request in proper form to
Common Sense Shareholder Services, which serves as the
Transfer Agent for both the Acquiring Fund and the
Acquired Fund. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
Exchange Privileges. Shareholders of
the Acquiring Fund may exchange at net asset value all or
a portion of their shares for shares of the same Class in
certain funds of the Smith Barney Mutual Funds. Any
exchange will be a taxable event for which a shareholder
may have to recognize a gain or a loss under Federal
income tax provisions. No initial sales charge is imposed
on the shares being acquired in an exchange, and no CDSC
is imposed on the shares being disposed of in the
exchange. However, a sales charge differential may apply
to exchanges of Class A shares with other Smith Barney
Mutual Funds. With respect to Class B shares of the
Acquiring Fund, for purposes of computing the CDSC that
may be payable upon a disposition, the Class B shares
acquired in the exchange will be deemed to have been
purchased on the same date as the Class B shares that were
exchanged. Class B shares of the Funds that are exchanged
for Class B shares of other Smith Barney Mutual Funds
imposing a higher CDSC will be subject to the higher
applicable CDSC. Shareholders of the Acquired Fund are not
permitted to exchange their shares for shares of the other
funds of the Trust.
Dividends. Each Fund's policy is to
declare and pay dividends from net investment income
annually and to make annual distributions of net realized
capital gains, if any. With respect to both Funds, unless
a shareholder otherwise instructs, dividends and capital
gain distributions will be reinvested automatically in
additional shares of the same Class at net asset value,
subject to no sales charge or CDSC. The distribution
option currently in effect for a shareholder of the
Acquired Fund will remain in effect after the
Reorganization. After the Reorganization, however, the
former Acquired Fund shareholders may change their
distribution option at anytime by contacting a Smith
Barney Financial Consultant. See "Dividends, Distributions
and Taxes" in the accompanying prospectus of the Acquiring
Fund.
Shareholder Voting Rights. Both the
Smith Barney Investment Funds and the Trust are registered with
the Securities and Exchange Commission (the "SEC") as
open-end management investment companies. The Acquiring
Fund is a separate series of Smith Barney Investment
Funds, a Maryland corporation having a Board of Directors.
The Acquired Fund is a separate series of Common Sense
Trust, a Massachusetts business trust, having a Board of
Trustees. Shareholders of both Funds have similar voting
rights. Neither Fund holds an annual meeting of
shareholders, and there is normally no meeting of
shareholders held for the purpose of electing
directors/trustees unless and until such time as less than
a majority of the directors/trustees holding office have
been elected by shareholders. At that time, the
directors/trustees in each Fund then in office will call a
shareholders' meeting for the election of
directors/trustees.
In addition, under the laws of the
Commonwealth of Massachusetts, shareholders of the
Acquired Fund do not have appraisal rights in connection
with a combination or acquisition of the assets of the
Fund by another entity. Shareholders of the Acquired Fund
may, however, redeem their shares at net asset value
(subject to any applicable CDSC) prior to the date of the
Reorganization.
For purposes of voting with respect to
the Reorganization, the Class A and Class B shares of the
Acquired Fund shall vote together as a single class. See
"Comparative Information on Shareholders' Rights-Voting
Rights."
RISK FACTORS
Due to the fact that the Acquiring Fund
and the Acquired Fund each invest primarily in common
stock, the investment risks of the Funds are generally
similar. The prices of common stocks and other securities
fluctuate and, therefore, the value of an investment in
both the Acquiring Fund and the Acquired Fund will vary
based upon each Fund's investment performance. Any income
from these investments will be incidental to the goal of
capital appreciation. Both Funds may use management
techniques and strategies involving options, futures
contracts and options on futures. The utilization of these
techniques may involve greater than ordinary investment
risks and the likelihood of more volatile price
fluctuation. Such risks, and certain differences in the
risks associated with investing in the Funds, are
discussed under the caption "Comparison of Investment
Objectives and Policies."
REASONS FOR THE REORGANIZATION
The Trustees of the Acquired Fund are
recommending that its shareholders approve the Plan. In making
such a recommendation, the Trustees considered, among other
things: (i) the fact that the investment advisory, distribution and
shareholder services would be provided to the Acquiring Fund
after the Reorganization by entities affiliated with The
Travelers Inc. (ii)
the ability of shareholders to exchange shares of the
Acquiring Fund for shares of certain other funds of the Smith
Barney Mutual Funds; (iii) the terms and conditions of the
Reorganization; and (iv) the fact that the Reorganization
will be effected as a tax-free reorganization.
In light of the foregoing, the Trustees
of the Trust, including the non-interested
Trustees, have decided that it is in the best interests of
the Acquired Fund and its shareholders to combine with the
Acquiring Fund. The Trustees have also determined that a
combination of the Acquired Fund and the Acquiring Fund
would not result in a dilution of the Acquired Fund's
shareholders' interests.
The Board of Directors of Smith Barney Investment Funds
considered the following factors, among others, in approving the
Reorganization and determining that it is advantageous to acquire the
assets of the Acquired Fund; (i) the terms and conditions of the
Reorganization; (ii) the fact that the Reorganizationwill result in a
significant increase in assets and (iii) the fact that the Reorganization
will be effected as a tax-free reorganization. Accordingly, the Board of
Directors of the Smith Barney Investment Funds, including a majority of the
non-interested Directors, has determined that the Reorganization is in
the best interests of the Acquired Fund's shareholders and that the
interests of the Acquired Fund's shareholders will not be diluted as a
result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following
summary of the Plan is qualified in its entirety by
reference to the Plan (Exhibit A hereto). The Plan
provides that the Acquiring Fund will acquire all or
substantially all of the assets of the Acquired Fund in
exchange for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of certain liabilities of
the Acquired Fund on June 30, 1995, or such later date as
may be agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor
to discharge all of its known liabilities and obligations.
The Acquiring Fund will not assume any liabilities or
obligations of the Acquired Fund other than those
reflected in an unaudited statement of assets and
liabilities of the Acquired Fund prepared as of the close
of regular trading on the New York Stock Exchange, Inc.
(the "NYSE"), currently 4:00 p.m. New York time, on the
Closing Date. The number of full and fractional Class A
and Class B shares of the Acquiring Fund to be issued to
the Acquired Fund shareholders will be determined on the
basis of the Acquiring Fund's and the Acquired Fund's
relative net asset values per Class A and Class B shares,
respectively, computed as of the close of regular trading
on the NYSE on the Closing Date. The net asset value per
share of each Class will be determined by dividing assets,
less liabilities, by the total number of outstanding
shares.
At or prior to the Closing Date, the
Acquired Fund will declare a dividend or dividends which,
together with all previous such dividends, shall have the
effect of distributing to their respective shareholders
all taxable income for the period ending on or prior to
the Closing Date. In addition, the Acquired Fund's
dividend will include its net capital gains realized in
the period ending on or prior to the Closing Date (after
reductions for any capital loss carryforward).
As soon after the Closing Date as
conveniently practicable, the Acquired Fund will liquidate
and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and
fractional shares of the Acquiring Fund received by the
Acquired Fund. Such liquidation and distribution will be
accomplished by the establishment of accounts in the names
of the Acquired Fund's shareholders on the share records
of the Acquiring Fund's shareholder servicing agent. Each
account will represent the respective pro rata number of
full and fractional shares of the Acquiring Fund due to
each of the Acquired Fund's shareholders. After such
distribution and the winding up of its affairs, the
Acquired Fund will be terminated.
The consummation of the Reorganization
is subject to the conditions set forth in the Plan.
Notwithstanding approval of the Acquired Fund's
shareholders, the Plan may be terminated at any time at or
prior to the Closing Date by (i) mutual agreement of the
Trust on behalf of the
Acquired Fund and Smith Barney Investment Funds on behalf
of the Acquiring Fund; (ii) by either party to the Plan
upon a material breach by the other party of any
representation, warranty or agreement contained therein to
be performed at or prior to the Closing Date; or (iii) by
either party if a
condition therein expressed to be precedent to the
obligations of the terminating party has not been met and
it reasonably appears that it will not or cannot be met.
Approval of the Plan will require the
affirmative vote of a majority of the outstanding shares
of the Acquired Fund. If the Reorganization is not
approved by shareholders of the Trust, the
Trustees of the Acquired Fund will consider other possible
courses of action, including liquidation of the Acquired
Fund.
Description of the Acquiring Fund's
Shares. Full and fractional shares of the respective
class of shares of common stock of the Acquiring Fund will
be issued to the Acquired Fund in accordance with the
procedures detailed in the Plan and as described in the
Acquiring Fund's Prospectus. Generally, the Acquiring Fund
does not issue share certificates to shareholders unless a
specific request is submitted to the Acquiring Fund's
shareholder servicing agent. The shares of the Acquiring
Fund to be issued to the Acquired Fund shareholders and
registered on the shareholder records of the shareholder
servicing agent will have no pre-preemptive rights.
Federal Income Tax Consequences. The
exchange of assets for shares of the Acquiring Fund is
intended to qualify for Federal income tax purposes as a
tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). As
a condition to the closing of the Reorganization, the
Acquiring Fund and the Acquired Fund will receive an
opinion from Sullivan & Worcester, counsel to the Acquired
Fund, to the effect that, on the basis of the existing
provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements
and court decisions, for Federal income tax purposes, upon
consummation of the Reorganization:
(1) the transfer of all or
substantially all of the Acquired Fund's assets in
exchange for the Acquiring Fund's shares and the
assumption by the Acquiring Fund of certain scheduled
liabilities of the Acquired Fund will constitute a
"reorganization" within the meaning of Section 368
(a)(1)(D) of the Code, and the Acquiring Fund and the
Acquired Fund are each a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be
recognized by the Acquiring Fund upon the receipt of the
assets of the Acquired Fund in exchange for the Acquiring
Fund's shares, and the assumption by the Acquiring Fund of
certain scheduled liabilities in the Acquired Fund;
(3) no gain or loss will be
recognized by the Acquired Fund upon the transfer of the
Acquired Fund's assets to the Acquiring Fund in exchange
for the Acquiring Fund shares and the assumption by the
Acquiring Fund of certain scheduled liabilities of the
Acquired Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund shares to the Acquired
Fund's shareholders;
(4) no gain or loss will be
recognized by shareholders of the Acquired Fund upon the
exchange of their Acquired Fund shares for the Acquiring
Fund shares and the assumption by the Acquiring Fund of
certain scheduled liabilities of the Acquired Fund;
(5) the aggregate tax basis of the
Acquiring Fund shares received by each Acquired Fund
shareholder pursuant to the Reorganization will be the
same as the aggregate tax basis of the Acquired Fund
shares surrendered in exchange therefor and the holding
period of the Acquiring Fund shares to be received by each
Acquired Fund shareholder will include the period during
which the shares of the Acquired Fund which are
surrendered in exchange therefor were held by such
shareholder (provided the Acquired Fund shares were held
as capital assets on the date of the Reorganization);and
(6) the tax basis of the Acquired
Fund's assets acquired by the Acquiring Fund will be the
same as the tax basis of such assets to the Acquired Fund
immediately prior to the Reorganization and the holding
period of the assets of the Acquired Fund in the hands of
the Acquiring Fund will include the period during which
such assets were held by the Acquired Fund.
Shareholders of the Acquired Fund should
consult their tax advisors regarding the effect, if any,
of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion
only relates to the Federal income tax consequences of the
Reorganization, shareholders of the Acquired Fund should
also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
Capitalization. The following table,
which is unaudited, shows the capitalization of the
Acquiring Fund and the Acquired Fund as of [ ],
1995 and on a pro forma basis as of that date, giving
effect to the proposed acquisition of assets at net asset
value:
(In thousands, except
per share values)
(Unaudited)
Acquiring Acquired
ProForma for
Class A Shares Fund*
Fund Reorganization
Net Assets................ $------
$------- $---
- ---- Net asset value per share.
$------ $-------
$-------
Shares outstanding........ -----
------ ----
- --
Acquiring Acquired Pro
forma for
Class B Shares
Fund* Fund
Reorganization
Net Assets................ $------
$------ $---
- ---
Net asset value per share. $------
$------ $---
- ---
Shares outstanding........ -----
----- -----
* The Acquiring Fund will commence operations on April --, 1995,
and accordingly, no
financial information is available at this time.
As of April 26, 1995 (the "Record
Date"), there were --- outstanding Class A shares and ---
outstanding Class B shares of the Acquired Fund. As of the
Record Date, the officers and trustees of the Trust
beneficially owned as a group less than 1% of the
outstanding shares of the Acquired Fund [,except that
57.9% of the outstanding Class A shares of the Acquired
Fund and 50.4% of the outstanding Class B shares of the
Acquired Fund were owned of record by Van Kampen American
Capital Trust Company, acting as custodian for certain
employee benefit plans and individual retirement
accounts.]. To the best knowledge of the Trustees of the
Trust, as of the Record Date, no shareholder or
"group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"),
except as set forth in the table below, owned beneficially
or of record more than 5% of the Acquired Fund.
Percentage of Class Owned of Record
or Beneficially
Name and As
of Upon Consummation
Address the
Record Date of the Reorganization
* The Acquiring Fund will commence operations on April --, 1995,
and accordingly,
there are no outstanding shares.
INFORMATION ABOUT THE ACQUIRED FUND
Management's Discussion and
Analysis of Market Conditions and Portfolio Review.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing
investment objectives, policies and restrictions of the
Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the respective investment
objectives, policies and restrictions sections of the
Prospectuses of the Acquiring Fund and the Acquired Fund.
There can be no assurance that either Fund will be able to
achieve its investment objective. For a full discussion of
the investment objectives, policies and restrictions of
the Acquiring Fund, refer to the Acquiring Fund's
Prospectus, which accompanies this Prospectus/Proxy
Statement, under the caption, "Investment Objective and
Management Policies," and for a discussion of these issues
as they apply to the Acquired Fund, refer to the Acquired
Fund's Prospectus under the caption, "Investment Practices
and Risks."
Investment Objective. The
investment objective of the Acquiring Fund is the same as
the investment objective of the Acquired Fund, which is to
seek capital appreciation by investing in securities
believed to have above average potential for capital
appreciation. Both the Acquiring Fund's and the Acquired
Fund's investment objectives are considered fundamental
and, as such, cannot be changed without the affirmative
vote of a majority, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), of the
outstanding voting securities of the respective Fund.
Certain of each Fund's investment policies are considered
non-fundamental and may be changed by the Board of
Directors/Trustees of the Smith Barney Investment Funds
or the Trust, as the case may be, provided such
change is not prohibited by the investment restrictions
(which are set forth in the applicable Statement of
Additional Information) or applicable law, and any such
change will first be disclosed in the then current
prospectus.
Primary Investments. The
Acquiring Fund and the Acquired Fund have the same
portfolio manager. The Acquiring Fund and the Acquired
Fund both invest primarily in common stocks and the
portfolio manager uses a flexible management style to
select what it believes to be unusually attractive growth
investments on an individual company basis. Such
securities will typically be issued by small
capitalization companies, larger companies with
established records of growth in sales or earnings, and
companies with new products, new services, or new
processes. Both Funds may also invest in companies in
cyclical industries during periods when their securities
appear overly depressed and therefore attractive for
capital appreciation. In addition to common stocks of
companies, the Funds may invest in securities convertible
into or exchangeable for common stocks, such as
convertible preferred stocks or convertible debentures and
warrants. The Funds generally hold a portion of their
assets in investment grade short-term debt securities,
investment grade corporate or government bonds, cash and
cash equivalents in order to provide liquidity. Such
investments may be increased when deemed appropriate by
the portfolio manager for temporary defensive purposes.
Under such circumstances, the Funds may invest up to 100%
of their assets in short-term investments which may
include repurchase agreements with domestic banks or
broker-dealers. The Funds may invest up to 35% of their
total assets in securities of foreign issuers. Both Funds
may also engage in portfolio management strategies and
techniques involving options, futures contracts and
options on futures. Investments in smaller capitalized
companies may offer greater opportunities for growth of
capital than larger, more established companies, but may
also involve certain risks because smaller capitalized
companies often have limited product use, market or
financial resources and may be dependent on one or two
people for management. Both the Acquiring Fund and the
Acquired Fund may purchase restricted securities (subject
to a limit on all illiquid securities of 15% of total
assets), invest in money market instruments, enter into
repurchase agreements for temporary defensive purposes,
lend portfolio securities and enter into forward
contracts.
Investment Techniques. Both the
Acquiring Fund and the Acquired Fund may enter repurchase
agreement transactions with domestic banks or broker-
dealers, whereby 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. Repurchase agreements
could involve certain risks in the event of default or
insolvency of the other party.
Both the Acquiring Fund and the
Acquired Fund expect to utilize options, futures contracts
and options thereon. The purchase and sale of options and
futures contracts involve risks different from those
involved with direct investments in securities. If the
portfolio manager is not successful in utilizing such
instruments, the Funds' performance could be worse than if
the Funds did not make such investments. Neither Fund may
purchase or sell futures contracts or related options for
which the aggregate initial margin and premiums exceed 5%
of the fair market value of the respective Fund's assets.
Both the Acquiring Fund and the
Acquired Fund may also invest in securities of foreign
issuers of developed and emerging market countries,
including non-U.S. dollar denominated securities,
Eurodollar securities and securities issued, assumed or
guaranteed by foreign governments or political
subdivisions or instrumentalities thereof and will limit
said investment in foreign securities to 35% of the
respective Fund's total assets. Both Funds may purchase
American Depositary Receipts as well as European
Depositary Receipts.
Both Fund's foreign currency
exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign
currency exchange market. Neither Fund purchases or sells
foreign currencies as an investment. Both Funds may also
enter contracts with banks or other foreign currency
brokers and dealers in which the Funds purchase or sell
foreign currencies at a future date ("future contracts")
and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange
rates. Both Funds may purchase or sell debt securities on
a "when-issued" or "delayed delivery" basis ("Forward
Commitments").
The Acquiring Fund and the
Acquired Fund may lend their portfolio securities in
amounts up to 33 1/3% of their total assets to
unaffiliated brokers, dealers and financial institutions,
provided that the borrower, at all times during the loan, must
maintain U.S. government securities or cash or cash
equivalents of at least 100% of the value of the
securities loaned and pays the Funds any dividends or
interest paid on such securities. The Funds may invest the
cash collateral in short-term instruments and earn
additional income.
Each Fund has adopted investment
restrictions to protect the shareholders, which
restrictions may not be changed without the approval of
the holders of a majority, as defined in the 1940 Act, of
the voting securities of the respective Fund. The
investment restrictions for both the Acquiring Fund and
the Acquired Fund are virtually the same, with the
exception that the Acquiring Fund may purchase securities
issued by any company primarily engaged in the manufacture
of alcohol or tobacco, whereas the Acquired Fund may not
purchase said securities.
Tax Considerations. The Acquiring
Fund and the Acquired Fund both intend to qualify as
"regulated investment companies" under the Code. By so
qualifying, neither Fund would be required to pay any
federal income tax. Dividends from net investment income
and distributions from any net realized short-term capital
gains are taxable to shareholders as ordinary income.
Distributions of any net capital gains designated by the
Funds as capital gains dividends are taxable to
shareholders as long-term capital gains regardless of the
length of time a shareholder may have held shares of the
Funds.
COMPARATIVE INFORMATION ON SHAREHOLDERS'
RIGHTS
General. Smith Barney Investment
Funds and the Trust are open-end, diversified
management investment companies registered under the 1940
Act, which continuously offer to sell shares at their
current net asset value. Smith Barney Investment Funds
is a Maryland corporation and is governed by its
Articles of Incorporation, By-Laws and Board of Directors.
the Trust is organized under the laws of
Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." the Trust is
governed by its Declaration of Trust, By-Laws and
Trustees. Smith Barney Investment Funds and
the Trust are also governed by applicable state and
Federal law. The Acquiring Fund is a separate series of
Smith Barney Investment Funds. Smith Barney Investment
Funds has an authorized capital of 10,000,000,000 shares
with a par value of $.001 per share. The Board of
Directors has authorized the issuance of five series of
shares, each representing shares in one of five separate
portfolios, and may authorize the issuance of additional
series of shares in the future. The assets of each
portfolio are segregated and separately managed and a
shareholder's interest is in the assets of the portfolio
in which he or she holds shares. [The beneficial interest
in the Acquired Fund is divided into shares, all with a
par value of $.001 per share. The number of authorized
shares that may be issued is unlimited.] In both the
Acquired Fund and the Acquiring Fund, Class A shares and
Class B shares represent interests in the assets of the
respective Fund and have identical voting, dividend,
liquidation, and other rights on the same terms and
conditions except that expenses related to the
distribution of each Class of shares are borne solely by
each Class and each Class of shares has exclusive voting
rights with respect to provisions of each Fund's Rule 12b-
1 distribution plan which pertains to a particular Class.
Directors/Trustees. The By-Laws
of the Smith Barney Investment Funds provide that the term
of office of each Director shall be from the time of his
or her election and qualification until his or her
successor is elected and qualified or until his or her
earlier death, resignation or removal. The Declaration of
Trust of the Acquired Fund provides that the term of
office of each Trustee shall be from the time of his or
her election until the termination of the Trust or his or
her earlier death, resignation, retirement, bankruptcy,
adjudicated incompetency or other incapacity or removal,
or if not so terminated, until the election of such
Trustee's successor in office has become effective. Any
Director of Smith Barney Investment Funds may be
removed with or without cause by the affirmative vote of
the holders of a majority of the votes entitled to be cast
thereon, and elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed
Directors. A Trustee of the Acquired Fund may be removed
with or without cause by written instrument, signed by at
least two-thirds of the Trustees, by vote of shareholders
holding not less than two-thirds of the shares of each
series then outstanding, cast in person or by proxy at any
meeting called for the purpose or by a written declaration
signed by shareholders holding not less than two-thirds of
the shares of each series then outstanding and filed with
the Trust's custodian. Vacancies on the Boards of either
Smith Barney Investment Funds or the Trust
may be filled by the Directors or Trustees, as the case
may be, remaining in office. A meeting of shareholders
will be required for the purpose of electing additional
Directors or Trustees whenever fewer than a majority of
the Directors or Trustees then in office were elected by
shareholders.
Voting Rights. Neither Smith
Barney Investment Funds nor the Trust holds
an annual meeting of shareholders, and there normally is
no meeting of shareholders for the purpose of electing
Directors/Trustees unless and until such time as less than
a majority of the Directors/Trustees holding office have
been elected by shareholders.
Liquidation or Dissolution. Bob,
should I call this liquidation or termination? In the
event of the liquidation or termination of any of the
portfolios of Smith Barney Investment Funds or of a
liquidation or termination of any series of the
Trust, the shareholders of the respective Funds are
entitled to receive, when, and as declared by the
Directors or the Trustees, as the case may be, the excess
of the assets belonging to the respective Fund over the
liabilities belonging to the respective Fund. In either
case, the assets so distributed to shareholders will be
distributed among the shareholders in proportion to the
number of shares held by them and recorded on the books of
the respective Fund.
Liability of Directors/Trustees.
The Articles of Incorporation of Smith Barney Investment
Funds provide that the Directors and officers shall not
be liable for monetary damages for breach of fiduciary
duty as a Director or officer, except to the extent such
exemption is not permitted by law. The Articles of
Incorporation further provide that Smith Barney Investment
Funds shall indemnify each Director and officer to the
fullest extent permitted by Maryland General Corporate
Law. Under the Declaration of Trust of the
Trust, a Trustee will be personally liable only for his or
her own willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the
conduct of the office of Trustee. The Declaration of Trust
further provides that Trustees and officers will be
indemnified for the expenses of litigation against them
unless it is determined that the person did not act in
good faith in the reasonable belief that the person's
actions were in or not opposed to the best interest of the
Trust or the person's conduct is determined to constitute
willful misfeasance, bad faith, gross negligence or
reckless disregard of the person's duties.
Rights of Inspection. Maryland
law permits any shareholder of Smith Barney Investment
Funds or any agent of such shareholder to inspect and copy
during the Fund's usual business hours the Fund's By-laws,
minutes of shareholder proceedings, annual statements of
the Fund's affairs and voting trust agreements on file at
its principal office. Shareholders of the
Trust have the same inspection rights as are permitted
shareholders of a Massachusetts corporation under
Massachusetts corporate law. Currently, each shareholder
of a Massachusetts corporation is permitted to inspect the
records, accounts and books of a corporation for any
legitimate business purpose.
Shareholder Liability. Under
Maryland law, Smith Barney Investment Fund's
shareholders do not have personal liability for the Fund's
corporate acts and obligations. Shares of the Acquiring
Fund issued to the shareholders of the Acquired Fund in
the Reorganization will be fully paid and nonassessable
when issued with no personal liability attaching to the
ownership thereof and transferable without restrictions
and will have no preemptive or conversion rights. Under
Massachusetts law, shareholders of the Acquired Fund may,
under certain circumstances be held personally liable for
the obligations of the Acquired Fund. The Declaration of Trust of
the Trust, however, disclaims shareholder
liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or
executed by the Trust. The Declaration of Trust of the
Trust also provides for indemnification out
of the property of the Acquired Fund for all losses and
expenses of any shareholder held personally liable for the
obligations of the Acquired Fund.
The foregoing is only a summary of
certain characteristics of the operations of the Acquiring
Fund and the Acquired Fund. The foregoing is not a
complete description of the documents cited. Shareholders
should refer to the provisions of the corporate documents
or trust documents and state laws governing each Fund for
a more thorough description.
ADDITIONAL INFORMATION ABOUT
THE ACQUIRING FUND
AND THE ACQUIRED FUND
The Acquiring Fund. Information
concerning the operation and management of the Acquiring
Fund is incorporated herein by reference from the
Prospectus dated April --, 1995, a copy of which is
included herewith, and in the Statement of Additional
Information dated April --, 1995, which has been filed
with the SEC. A copy of such Statement of Additional
Information is available upon request and without charge
by writing the Acquiring Fund at 388 Greenwich Street, New
York, New York 10013 or by calling (800) 224-7523.
The Acquired Fund. Information
about the Acquired Fund is incorporated herein by
reference from its current Prospectus dated February 21,
1995 and in the Statement of Additional Information dated
February 21, 1995, which has been filed with the SEC. A
copy of the Prospectus and the Statement of Additional
Information is available upon request and without charge
by writing the Acquired Fund at 3100 Breckenridge
Boulevard, Duluth, Georgia 30199 or by calling (800) ___-
____.
Both the Acquiring Fund and the
Acquired Fund are subject to the informational
requirements of the 1940 Act and in accordance
therewith file reports and other information including
proxy material, reports and charter documents with the
SEC. These reports can be inspected and copies obtained at
the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the
New York Regional Office of the SEC, 75 Park Place, New
York, New York 10007. Copies of such material can also be
obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC,
Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of the Trust
do not intend to present any other business at the
Meeting. If, however, any other matters are properly
brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance
with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is
furnished in connection with a solicitation of proxies by
the Trustees of the Trust on behalf of the
Acquired Fund to be used at the Special Meeting of
Shareholders to be held at [ ] on June 23, 1995, at [
] and at any adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting and a proxy
card, is first being mailed to shareholders of the
Acquired Fund on or about May --, 1995. Only shareholders
of record as of the close of business on the Record Date
will be entitled to notice of, and to vote at, the Meeting
or any adjournment thereof. The holders of a majority of
the shares of the Acquired Fund outstanding at the close
of business on the Record Date present in person or
represented by proxy will constitute a quorum for the
Meeting. For purposes of determining a quorum for
transacting business at the Meeting, abstentions and
broker "non-votes" (that is, proxies from brokers or
nominees indicating that such persons have not received
instructions from the beneficial owner or other persons
entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have
discretionary power) will be treated as shares that are
present but which have not been voted. For this reason,
abstentions and broker non-votes will have the effect of a
"no" vote for purposes of obtaining the requisite approval
of the Plan. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting,
the proxies named therein will vote the shares represented
by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed
Reorganization and FOR any other matters deemed
appropriate. A proxy may be revoked at any time on or
before the Meeting by written notice to the Acquired Fund,
[3100 Breckenridge Boulevard, Duluth, Georgia 30199] c/o
the Corporate Secretary. Unless revoked, all valid proxies
will be voted in accordance with the specifications
thereon or, in the absence of such specifications, FOR
approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require
the affirmative vote of a majority of the outstanding
shares of the Acquired Fund. Shareholders of Class A and B
shares of the Acquiring Fund shall vote together as a
single Class. Shareholders of the Acquired Fund are
entitled to one vote for each share.
Proxies are solicited by mail.
Additional solicitations may be made by telephone,
telegraph or personal contact by officers or employees of
Smith Barney and its affiliates and/or by The Shareholder
Services Group, Inc., a subsidiary of First Data
Corporation (the Acquiring Fund's co-transfer agent).
Expenses of the Reorganization, including the costs of
proxy solicitation, the preparation of this
Prospectus/Proxy Statement and enclosures attached hereto
and reimbursement of expenses for forwarding solicitation
material to beneficial owner of shares of the Acquired
Fund will be borne by Smith Barney Inc.
In the event that sufficient votes
to approve the Reorganization are not received by June 30,
1995, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation
of proxies. In determining whether to adjourn the Meeting,
the following factors may be considered: the percentage of
votes actually cast, the percentage of negative votes
actually cast, the nature of any further solicitation and
the information to be provided to shareholders with
respect to the reasons for the solicitation. Any such
adjournment will require an affirmative vote by the
holders of a majority of the shares present in person or
by proxy and entitled to vote at the Meeting. The persons
named as proxies will vote upon such adjournment after
consideration of the best interests of all shareholders.
The votes of the shareholders of
the Acquiring Fund are not being solicited by this
Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets
and liabilities of the Acquired Fund as of October 31,
1994, and the related statements of operations for the
periods then ended and changes in net assets for the two
periods then ended and financial highlights, have been
incorporated by reference into the Statement of Additional
Information relating to this Prospectus/Proxy Statement in
reliance on the reports of [Ernst & Young], independent
auditors for the Acquired Fund, given on the authority of
such firm as experts in accounting and auditing. There is
no financial information available at this time for the
Acquiring Fund, since it has not yet had operations.
LEGAL MATTERS
The validity of the shares of the
Acquiring Fund to be issued in the Reorganization will be passed
upon by Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022. In rendering such opinion, Willkie
Farr & Gallagher may rely on an opinion of Venable, Baetjer
and Howard, LLP, Baltimore, Maryland, as to certain
matters under Maryland law.
THE TRUSTEES OF THE TRUST,
INCLUDING THE "NON-INTERESTED" TRUSTEES, UNANIMOUSLY
RECOMMEND APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES
WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN
FAVOR OF APPROVAL OF THE PLAN.
STATEMENT OF ADDITIONAL INFORMATION DATED MAY __,
1995
Acquisition Of The Assets Of
GROWTH OPPORTUNITY FUND
a separate investment portfolio of Common Sense
Trust
3100 Breckenridge Boulevard
Duluth, Georgia 30199
(800)
By And In Exchange For Class A and Class B Shares of
SMITH BARNEY GROWTH OPPORTUNITY FUND
a separate investment portfolio of
SMITH BARNEY INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Statement of Additional Information,
relating specifically to the proposed transfer of all or
substantially all of the assets of Common Sense Trust, on
behalf of the Growth Opportunity Fund (the "Acquired
Fund") to Smith Barney Investment Funds, Inc. ("Smith
Barney Investment Funds") on behalf of its Growth
Opportunity Fund (the "Acquiring Fund") in exchange for
Class A and Class B shares of the Acquiring Fund and the
assumption by Smith Barney Investment funds on behalf of
the Acquiring Fund of certain scheduled liabilities of the
Acquired Fund, consists of this cover page and the
following described documents, each of which accompanies
this Statement of Additional Information and is
incorporated herein by reference.
1. Statement of Additional Information of Smith
Barney Investment Funds, Inc. dated March 1, 1995.
2. Statement of Additional Information of Growth
Opportunity Fund dated April __, 1995.
3. Annual Report of Growth Opportunity Fund for
the fiscal year ended October 31, 1994.
4. Pro Forma Financial Statements.
This Statement of Additional information is
not a prospectus. A Prospectus/Proxy Statement, dated May
- --, 1995, relating to the above-referenced matter may be
obtained without charge by calling or writing either the
Acquiring Fund or the Acquired Fund at the telephone
numbers or addresses set forth above. This Statement of
Additional Information should be read in conjunction with
the Prospectus/Proxy Statement dated May __, 1995.
The date of this Statement of Additional
Information is May --, 1995.
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY INVESTMENT FUNDS, INC.
DATED MARCH 1, 1995
Smith Barney
INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION MARCH 1, 1995
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Invest-
ment Funds Inc. (the "Company"), dated March 1, 1995, as amended or sup-
plemented 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 a 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 en-
tirety.
CONTENTS
For ease of reference, the same section headings are used in the Prospec-
tuses 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 Objectives and Management Policies 6
Purchase of Shares 21
Redemption of Shares 22
Distributor 23
Valuation of Shares 25
Exchange Privilege 26
Performance Data (See in the Prospectuses "Performance") 27
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes") 31
Additional Information 35
Financial Statements 35
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>
Smith Barney Inc. Distributor
("Smith Barney")
Smith Barney Mutual Funds Management Inc. Investment Adviser and Administrator
("SBMFM")
The Boston Company Advisors, Inc. Sub-Administrator
("Boston Advisors")
Boston Safe Deposit and Trust Company Custodian
("Boston Safe")
The Shareholder Services Group, Inc. ("TSSG"), Transfer Agent
a subsidiary of First Data Corporation
</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 names of the Directors and executive officers of the Company, together
with information as to their principal business occupations during the
past five years, are shown below. Each Director who is an "interested per-
son" of the Company, as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), is indicated by an asterisk.
Paul R. Ades, Director (age 56). Partner in the law firm of Murov & Ades.
His address is 272 South Wellwood Avenue, Lindenhurst, New York 11757.
Herbert Barg, Director (age 71). Private investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman, Director (age 65). Chairman and Chief Executive Officer
of the Chicago Board of Options Exchange. His address is Chicago Board of
Options Exchange, 400 South LaSalle Street, Chicago, Illinois 60605.
Dwight B. Crane, Director (age 57). Professor, Graduate School of Business
Administration, Harvard University; a Director of Peer Review Analysis,
Inc. His address is Graduate School of Business Administration, Harvard
University, Boston, Massachusetts 02163.
Frank G. Hubbard, Director (age 59). Corporate Vice President, Materials
of Huls America, Inc. His address is 80 Centennial Avenue P.O. Box 456,
Piscataway, New Jersey 08855-0456.
Allan R. Johnson, Director (age 80). Retired; Former Chairman, Retail Di-
vision of BATUS, Inc., and Chairman and Chief Executive Officer of Saks
Fifth Avenue, Inc. His address is 2 Sutton Place South, New York, New York
10022.
*Heath B. McLendon, Chairman of the Board and Investment Officer (age 61).
He also performs this function for 30 other mutual funds in the Smith Bar-
ney Mutual Funds family. Managing Director of Smith Barney, Chairman of
Smith Barney Strategy Advisers Inc. ("SBSA") and President of SBMFM; prior
to July 1993, Senior Executive Vice President of Shearson Lehman Brothers
Inc. ("Shearson Lehman Brothers"); Vice Chairman of Shearson Asset Manage-
ment, a Director of PanAgora Asset Management, Inc. and PanAgora Asset
Management Limited. His address is 388 Greenwich Street, New York, New
York 10013.
Ken Miller, Director (age 54). President of Young Stuff Apparel Group,
Inc. His address is 1407 Broadway, 6th Floor, New York, New York 10018.
John F. White, Director (age 79). President Emeritus of The Cooper Union
for the Advancement of Science and Art; President of Emily D. and Joseph
S. Kornfeld Foundation. His address is Crows Nest Road, Tuxedo Park, New
York 10987.
Jessica M. Bibliowicz, President (age 35). She also performs this function
for 26 other mutual funds in the Smith Barney Mutual Funds family. Execu-
tive Vice President of Smith Barney; prior to 1994, Director of Sales and
Marketing for Prudential Mutual Funds; prior to 1990, First Vice Presi-
dent, Asset Management Division of Shearson Lehman Brothers. Her address
is 388 Greenwich Street, New York, New York 10013.
James E. Conroy, First Vice President and Investment Officer (age 43). He
also performs this function for 4 other mutual funds in the Smith Barney
Mutual Funds family. Managing Director of SBMFM; prior to July 1993, Man-
aging Director of Shearson Lehman Advisors. His address is 388 Greenwich
Street, New York, New York 10013.
Kenneth A. Egan, First Vice President (age 43). He does not perform this
function for any other mutual funds in the Smith Barney Mutual Funds fam-
ily. Managing Director of SBMFM; prior to July 1993, Managing Director of
Shearson Lehman Advisors. His address is 388 Greenwich Street, New York,
New York 10013.
George E. Mueller, Jr., Investment Officer (age 54). Managing Director of
SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advisors.
His address is 388 Greenwich Street, New York, New York 10013.
George V. Novello, Investment Officer (age 52). Managing Director of
SBMFM; 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 388 Greenwich
Street, New York, New York 10013.
Jeffrey Russell, Investment Officer (age 35). Managing Director, Senior
International Equity Portfolio Manager, SBMFM; prior to 1990 Vice Presi-
dent of Drexel Burham, Lambert. His address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (age 37). He also
performs this function for 42 other mutual funds in the Smith Barney Mu-
tual Funds family. Managing Director of Smith Barney; Chief Financial Of-
ficer of the Smith Barney Mutual Funds; and Director and Senior Vice Pres-
ident of SBMFM. His address is 388 Greenwich Street, New York, New York
10013.
Christina T. Sydor, Secretary (age 44). She also performs this function
for 42 other mutual funds in the Smith Barney Mutual Funds family. Manag-
ing Director of Smith Barney and Secretary of SBMFM. Her address is 388
Greenwich Street, New York, New York, 10013.
Each Director also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor.
As of January 31, 1995, the Directors and officers of the Company, as a
group, owned less than 1.00% of the outstanding common stock of the Com-
pany.
No officer, director or employee of Smith Barney or any parent or subsid-
iary 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, director or employee of Smith Barney or any of its affiliates a
fee of $16,000 per annum plus $2,500 per meeting attended and reimburses
travel and out-of-pocket expenses. For the fiscal year ended December 31,
1994, the Directors of the Company were paid the following compensation:
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
AGGREGATE COMPENSATION FROM THE SMITH BARNEY
DIRECTOR(*) FROM THE COMPANY MUTUAL FUNDS
<S> <C> <C>
Paul R. Ades(4) $ 9,500 $ 42,750
Herbert Barg(13) 9,500 77,850
Alger B. Chapman(4) 29,000 57,675
Dwight B. Crane(18) 32,000 125,975
Frank G. Hubbard(3) 32,000 37,125
Allan G. Johnson(4) 32,000 72,750
Ken Miller(4) 9,500 49,250
John F. White(4) 32,000 72,250
<FN>
(*) Number of director/trusteeships held with other mutual funds in the
Smith Barney Mutual Funds family.
</TABLE>
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Funds pursuant to a transfer of
the investment advisory agreements effective November 7, 1994 from its af-
filiate, Mutual Management Corp. Mutual Management Corp. and SBMFM are
both wholly owned subsidiaries of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. ("Travelers").
The advisory agreements with the Funds (the "Advisory Agreements") were
most recently approved by the Board of Directors, including a majority of
the Directors who are not "interested persons" of the Company or the in-
vestment advisers (the "Independent Directors"), on April 7, 1993 and by
shareholders of the respective Funds on June 9, 1993. Each of the invest-
ment advisers bears all expenses in connection with the performance of its
services. The services provided by the investment advisers under the Advi-
sory Agreements are described in the Prospectuses under "Management of the
Company and the Fund." SBMFM provides investment advisory and management
services to investment companies affiliated with Smith Barney.
As compensation for investment advisory services rendered to Investment
Grade Bond Fund and Special Equities Fund, each Fund pays SBMFM a fee com-
puted daily and paid monthly at the annual rates of 0.45% and 0.55%, re-
spectively, of the value of their average daily net assets.
As compensation for investment advisory services rendered to Government
Securities Fund, the Fund pays SBMFM a fee computed daily and paid monthly
at the following annual rates of average daily net assets: 0.35% up to $2
billion; 0.30% on the next $2 billion; 0.25% on the next $2 billion; 0.20%
on the next $2 billion; and 0.15% on net assets thereafter.
For the fiscal years ended December 31, 1992, 1993 and 1994, the Funds ac-
crued approximate advisory fees as follows:
<TABLE>
<CAPTION>
FUND 1992 1993 1994
<S> <C> <C> <C>
Investment Grade Bond Fund $1,879,000 $2,157,373 $1,926,359
Government Securities Fund 3,926,000 3,357,123 2,578,209
Special Equities Fund 385,000 548,764 1,052,635
</TABLE>
SBMFM also serves as administrator to each Fund pursuant to a written
agreement dated May 5, 1994 (the "Administration Agreement") which was
first approved by the Board of Directors, including a majority of the In-
dependent Directors, on May 5, 1994. The services provided by SBMFM under
the Administration Agreement are described in the Prospectuses under "Man-
agement of the Company and the Fund." SBMFM pays the salary of any officer
and employee who is employed by both it and the Fund and bears all ex-
penses in connection with the performance of its services. Prior to May 5,
1994, Boston Advisors served as the Company's sub-investment adviser
and/or administrator.
As compensation for administrative services rendered to each Fund, SBMFM
receives a fee computed daily and paid monthly at the annual rate of 0.20%
of the value of its average daily net assets. For the fiscal years ended
December 31, 1992, 1993 and 1994, the Funds paid administrative fees to
Boston Advisors or SBMFM as follows:
<TABLE>
<CAPTION>
BOSTON ADVISORS SBMFM
FOR THE FISCAL FOR THE FISCAL
PERIOD FROM 1/1/94 PERIOD FROM 5/5/94
FUND 1992 1993 THROUGH 5/4/94 THROUGH 12/31/94
<S> <C> <C> <C> <C>
Investment Grade Bond Fund $ 835,000 $ 958,700 $290,859 $565,300
Government Securities Fund 2,243,000 1,918,367 500,505 972,757
Special Equities Fund 140,000 199,551 130,039 252,737
</TABLE>
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors serves as sub-administrator to each Fund pursuant to a
written agreement (the "Sub- Administration Agreement") dated May 5, 1994,
which was first approved by the Company's Board of Directors, including a
majority of the Independent Directors of the Company or Boston Advisors on
May 5, 1994. Under the Sub-Administration Agreement, Boston Advisors is
paid a portion of the administration fee paid by the Fund to SBMFM at a
rate agreed upon from time to time between Boston Advisors and SBMFM. Bos-
ton Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), a financial services holding company, which is in turn an indi-
rect wholly owned subsidiary of Mellon Bank Corporation ("Mellon").
Certain of the services provided to the Company by Boston Advisors pursu-
ant to the Sub-Administration Agreement are described in the Prospectuses
under "Management of the Company and the Fund." In addition to those ser-
vices, Boston Advisors pays the salaries of all officers and employees who
are employed by both it and the Company, maintains office facilities for
the Company, furnishes the Company with statistical and research data,
clerical help and accounting, data processing, bookkeeping, internal au-
diting and legal services and certain other services required by the Com-
pany, prepares reports to the Company's shareholders and prepares tax re-
turns, reports to and filings with the Securities and Exchange Commission
(the "SEC") and state Blue Sky authorities. Boston Advisors bears all ex-
penses in connection with the performance of its services.
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 Smith Barney, SBMFM
or Boston Advisors; SEC fees and state Blue Sky qualification fees;
charges of custodians; transfer and dividend disbursing agent's fees; cer-
tain insurance premiums; outside auditing and legal expenses; costs of
maintenance of corporate existence; investor services (including allocated
telephone and personnel expenses); and costs of preparation and printing
of prospectuses for regulatory purposes and for distribution to existing
shareholders; cost of shareholders' reports and shareholder meetings and
meetings of the officers or Board of Directors of the Company.
SBMFM and Boston Advisors have agreed that if in any fiscal year the ag-
gregate expenses of a Fund (including fees paid pursuant to the Advisory,
Administration and Sub-Administration Agreements, but excluding interest,
taxes, brokerage fees paid pursuant to the Fund's services and distribu-
tion plan, and, with the prior written consent of the necessary state se-
curities commissions, extraordinary expenses) exceed the expense limita-
tion of any state having jurisdiction over the Fund, SBMFM and Boston Ad-
visors will, to the extent required by law, reduce their fees by the
amount of such excess expense, 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 estimated and
reconciled on a monthly basis. The most restrictive state limitation ap-
plicable to the Company would require SBMFM and Boston Advisors 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 1994, 1993 and 1992 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as counsel to the Company. The Directors
who are not "interested persons" of the Company have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick, LLP, independent accountants, 345 Park Avenue, New
York, New York 10154, serve as auditors of the Fund and will render an
opinion on the Fund's financial statements annually. Prior to October 19,
1994, Coopers & Lybrand L.L.P., independent auditors, served as auditors
of the Fund and rendered an opinion on the Fund's financial statements for
the fiscal year ended December 31, 1994.
INVESTMENT OBJECTIVES 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 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 securi-
ties (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; negotiable
bank certificates of deposit or bankers' acceptances issued by domestic
banks (but not their foreign branches) having together with branches or
subsidiaries, total assets in excess of $1 billion; high-yielding common
stocks (which may be purchased directly or acquired through the exercise
of warrants or the conversion of fixed-income securities); and 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
SBMFM uses these ratings as a criterion for the selection of securities
for the Fund, SBMFM also relies on its independent analysis to evaluate
potential investments for the Fund. The Fund's achievement of its invest-
ment objective may be more dependent on SBMFM's credit analysis of low-
rated and unrated 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 SBMFM will consider these events in determin-
ing whether the Fund should continue to hold the securities. To the extent
that the ratings given by Moody's or S&P for securities may change as a
result of changes in the rating systems or due to a corporate reorganiza-
tion of Moody's and/or S&P, the Fund will attempt to use comparable rat-
ings as standards for its investments in accordance with the investment
objective and policies of the Fund.
As a condition of its continuing registration in a state, Investment Grade
Bond Fund has undertaken that its investments in warrants, valued at the
lower of cost or market, will not exceed 5% of the value of its net as-
sets. 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 ac-
quired 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 fun-
damental policies of the Fund and may be changed by the Board of Directors
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 its assets will be invested
in bonds, except during times when SBMFM believes that adoption of a tem-
porary defensive position by investing more heavily in cash or money mar-
ket 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 ac-
cordance with SEC guidelines which require that any investment company
whose name implies that it invests primarily in a particular type of secu-
rity 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 shareholder 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 which are the
issuers of instruments acceptable for purchase by the Fund and with cer-
tain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Repurchase agreements are contracts under which the buyer of a
security 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.
SBMFM or Boston Advisors, 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 evaluate potential risks. The Fund
will not enter into repurchase agreements that would cause more than 10%
of its total assets to be invested in "illiquid" 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, 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, 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 securi-
ties from its portfolio to brokers, dealers and other financial organiza-
tions. Such loans, if and when made, may not exceed 33 1/3 % of the Fund's
total assets taken at value. The Fund will not lend portfolio securities
to Smith Barney or its affiliates 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 secu-
rities 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 return a part of the interest earned from the investment of col-
lateral received for securities loaned to the borrower and/or a third
party, which is unaffiliated with the Fund or with Smith Barney, and which
is acting as a "finder."
In lending its 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. Requirements of the SEC, which may be subject to
future modifications, currently provide that the following conditions must
be met whenever the Fund's 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 col-
lateral; (c) the Fund must be able to terminate the loan at any time; (d)
the Fund must receive reasonable interest on the loan, as well as an
amount equal to dividends, interest or other distributions on the loaned
securities, and any increase in market value; (e) the Fund may pay only
reasonable custodian fees in connection with the loan; and (f) voting
rights on the loaned securities may pass to the borrower; provided, how-
ever, that if a material event adversely affecting the investment in the
loaned securities occurs, the Board of Directors must terminate the loan
and regain the right to vote the securities. The risks in lending portfo-
lio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to firms deemed by SBMFM to
be of good standing and will not be made unless, in the judgment of SBMFM,
the consideration to be earned from such loans would justify the risk.
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 United States Trea-
sury include a variety of securities, which differ in their interest
rates, maturities 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 United States Treasury, securi-
ties issued or guaranteed by the United States government, its agencies or
instrumentalities include securities issued or guaranteed by the Federal
Housing Administration, Federal Financing Bank, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association ("FNMA"), Federal Maritime Administration, Tennessee Valley
Authority, Resolution Trust Corporation, District of Columbia Armory
Board, Student Loan Marketing Association and various institutions that
previously were or currently are part of the Farm Credit System (which has
been undergoing a reorganization since 1987). Because the United States
government is not obligated by law to provide support to an instrumental-
ity that it sponsors, the Fund will invest in obligations of an instrumen-
tality to which the United States government is not obligated by law to
provide support only if SBMFM determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for invest-
ment by the Fund.
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 SBMFM 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 con-
ditions. This policy was adopted in accordance with SEC guidelines 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 shareholder approval in the
event that the SEC's guidelines are modified.
The Fund's current investment income consists generally of interest income
from U.S. government securities, premiums from expired put and call op-
tions written by the Fund, net gains from closing purchase and sale trans-
actions, and net gains from sales of portfolio securities pursuant to op-
tions or otherwise.
Exchange Rate-Related U.S. Government Securities. The Fund may invest up
to 5% of its net assets in U.S. government securities for which the prin-
cipal 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 ("Exchange 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. government 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
complied with.
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 SE-
CURITIES
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, 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 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 SBMFM 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 declined, 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 the actual purchase of the underly-
ing securities, but permits the continued holding of securities other than
the underlying securities. For example, if SBMFM expects long-term inter-
est rates to decline, the Fund might enter into futures contracts for the
purchase of long-term securities, so that it could gain rapid market expo-
sure that may offset anticipated increases in the cost of securities it
intends to purchase, while continuing to hold higher-yield short-term se-
curities 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 reduce the Fund's
risks. The Fund may not purchase futures contracts or related options if,
immediately thereafter, more than 30% of the Fund's total assets would be
so invested. In purchasing and selling futures contracts and related op-
tions, the Fund will comply with rules and interpretations of the Commod-
ity Futures Trading Commissions ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." In order to prevent leverage 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 segre-
gated 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 SBMFM believes to have superior appreciation 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
SBMFM's opinion of their fair value until they may be sold publicly. The
Fund ordinarily will acquire the right to have such securities registered
at the expense of the issuer within some specified period of time. Where
registration is required prior to sale, a considerable period of time may
elapse between a decision to sell the restricted securities 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 public 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 SBMFM believes that adoption of a temporary defensive
position is desirable due to prevailing market or economic conditions.
Special Equities Fund may lend its portfolio securities, in accordance
with the description set forth under "Investment Grade Bond Fund -- Lend-
ing of Portfolio Securities" above. Special Equities Fund's investments in
warrants are subject to the same undertaking applicable to Investment
Grade Bond Fund, as described above. The limits contained in that under-
taking 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 other Funds.
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, if immediately after such pur-
chase 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. (For purposes of this limitation, foreign banks or their agencies or
subsidiaries 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 to increase its 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 (for purposes of this restriction, issuers include predecessors,
sponsors, controlling persons, general guarantors and originators of un-
derlying assets);
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. 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. 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. 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 registration 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.
BROKERAGE
In selecting brokers or dealers to execute securities transactions on be-
half of a Fund, SBMFM seeks the best overall terms available. In assessing
the best overall terms available for any transaction, SBMFM will consider
the factors that it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and exe-
cution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing
basis. In addition, each investment advisory agreement authorizes SBMFM,
in selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the Se-
curities Exchange Act of 1934) provided to the Company, the other Funds
and other accounts over which SBMFM or its affiliates exercise investment
discretion. The fees under the investment advisory agreements and the ad-
ministration agreement between the Company and SBMFM 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 commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Company. SEC rules
require that commissions paid to Smith Barney by a Fund on exchange trans-
actions not exceed "usual and customary brokerage commissions." 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 connection with comparable
transactions involving similar securities being purchased or sold on a se-
curities exchange during a comparable period of time." The Board of Direc-
tors, particularly the Independent Directors of the Company, has adopted
procedures for evaluating the reasonableness of commissions paid to Smith
Barney and reviews these procedures periodically. In addition, under rules
adopted by the SEC, Smith Barney may directly execute transactions for a
Fund on the floor of any national securities exchange, provided: (a) the
Board of Directors has expressly authorized Smith Barney to effect such
transactions; and (b) Smith Barney annually advises the Fund of the aggre-
gate compensation it earned on such transactions.
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 SBMFM 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.
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
conditions set forth in rules of the SEC, the Company may purchase securi-
ties from an underwriting 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 Directors, particularly those Directors who are not interested persons
of the Company.
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
DECEMBER 31, FUND FUND
<S> <C> <C> <C>
Total Brokerage Commissions 1992 $238,425 $267,089
1993 $717,340 $139,427
1994 $686,000 $217,269
Commissions paid to 1992 $ 0 $ 56,498
Smith Barney* 1993 $ 87,550 $ 16,614
1994 $ 0 $ 14,280
% of Total Brokerage 1994 N/A 6.8%
Commissions paid to
Smith Barney*
% of Total Transactions 1994 N/A 7.5%
involving Commissions paid
to Smith Barney*
<FN>
* Includes commissions paid to Shearson Lehman Brothers, the Company's
distributor prior to 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 SBMFM deem it advisable to purchase or sell securities.
Special Equities Fund invests for long-term capital appreciation and will
not generally trade for short-term profits. However, its portfolio will be
adjusted as deemed advisable by the investment adviser, and portfolio
turnover will not be a limiting factor should SBMFM deem it advisable to
purchase or sell securities.
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, 1993 and 1994, the portfolio turn-
over rates were as follows:
<TABLE>
<CAPTION>
FUND 1993 1994
<S> <C> <C>
Investment Grade Bond Fund 65% 18%
Government Securities Fund 540% 276%
Special Equities Fund 112% 123%
</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).
SBMFM manages a number of private investment accounts on a discretionary
basis and it is not bound by the recommendations of the Smith Barney re-
search department in managing the Funds. Although investment decisions are
made individually for each client, at times decisions may be made to pur-
chase or sell the same securities for one or more of the Funds and/or for
one or more of the other accounts managed by SBMFM or the 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 con-
sidered equitable to each, with emphasis on purchasing or selling entire
orders wherever possible. In some cases, this procedure may adversely af-
fect the price paid or received by a Fund or the size of the position ob-
tained 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's spouse and his
or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the 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; and (f) a trustee or other professional fiduciary
(including a bank, or an investment adviser registered with the SEC under
the Investment Advisers Act of 1940, as amended) purchasing shares of a
Fund for one or more trust estates or fiduciary accounts. Purchasers who
wish to combine purchase orders to take advantage of volume discounts on
Class A shares should contact a Smith Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the 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 of the Smith Barney Mutual Funds that are
offered with a sales charge, including the purchase being made, of any
purchaser, is $25,000 or more. The reduced sales charge is subject to con-
firmation 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 written notice to shareholders.
For further information regarding the right of accumulation, shareholders
should contact a 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 a Class A and Class Y share of each Fund is equal
to the net asset value per share at the time of purchase plus, for Class A
shares, an initial sales charge based on the aggregate amount of the in-
vestment. The public offering price for a Class B share and Class C share,
and Class A share purchases, including applicable right of accumulation,
equalling or exceeding $500,000, is equal to the net asset value per share
at the time of purchase and no sales charge is imposed at the time of pur-
chase. A contingent deferred sales charge ("CDSC"), however, is imposed on
certain redemptions of Class B shares, Class C shares, and Class A shares
when purchased in amounts equalling or exceeding $500,000. The method of
computation of the public offering price is shown in each Fund's financial
statements, incorporated by reference in their entirety into this State-
ment of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the NYSE is closed (other than for custom-
ary weekend and holiday closings), (b) when trading in markets a Fund nor-
mally utilizes is restricted, or an emergency, as determined by the SEC,
exists, so that disposal of the Fund's investments or determination of net
asset value is not reasonably practicable or (c) for such other periods as
the SEC by order may permit for the protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND
If the Board of Directors of the Company determines that it would be det-
rimental to the best interests of the remaining shareholders of a Fund to
make a redemption payment wholly in cash, the Fund may pay, in accordance
with SEC rules, any portion of a redemption in excess of the lesser of
$250,000 or 1% of the Fund's net assets by a distribution in kind of port-
folio securities in lieu of cash. Securities issued as a distribution in
kind may incur brokerage commissions when shareholders subsequently sell
those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of a Fund as may be necessary
to cover the stipulated withdrawal payment. Any applicable CDSC will not
be waived on amounts withdrawn by shareholders that exceed 1.00% per month
of the value of a shareholder's shares at the time the Withdrawal Plan
commences. (With respect to Withdrawal Plans in effect prior to November
7, 1994, any applicable CDSC will be waived on amounts withdrawn that do
not exceed 2.00% per month of the value of a shareholder's shares at the
time the Withdrawal Plan commences.) To the extent withdrawals exceed div-
idends, distributions and appreciation of a shareholder's investment in a
Fund, there will be a reduction in the value of the shareholder's invest-
ment and continued withdrawal payments may reduce the shareholder's in-
vestment and ultimately exhaust it. Withdrawal payments should not be con-
sidered as income from investment in the Fund. Furthermore, as it gener-
ally would not be advantageous to a shareholder to make additional
investments in the Fund at the same time that he or she is participating
in the Withdrawal Plan, purchases by such shareholders in amounts of less
than $5,000 will not ordinarily be permitted.
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. Withdrawal Plans
should be set up with a Smith Barney Financial Consultant. A shareholder
who purchases shares directly through TSSG may continue to do so and ap-
plications for participation in the Withdrawal Plan must be received by
TSSG no later than the eighth day of the month to be eligible for partici-
pation beginning with that month's withdrawal. For additional information,
shareholders should contact a 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") which
was most recently approved by the Company's Board of Directors on August
4, 1994.
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 may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as investment in
a money market fund (other than Smith Barney Exchange Reserve Fund) of the
Smith Barney Mutual Funds. If the investor instructs Smith Barney to in-
vest the funds in a Smith Barney money market fund, the amount of the in-
vestment will be included as part of the average daily net assets of both
the Company and the money market fund, and affiliates of Smith Barney that
serve the funds in an investment advisory capacity will benefit from the
fact that they are receiving fees from both such investment companies for
managing these assets computed on the basis of their average daily net as-
sets. The Company's Board of Directors has been advised of the benefits to
Smith Barney resulting from these settlement procedures and will take such
benefits into consideration when reviewing the Advisory, Administration
and Distribution Agreements for continuance.
For the fiscal year ended December 31, 1994, Smith Barney incurred distri-
bution expenses totalling approximately $11,061,000, consisting of approx-
imately $130,000 for advertising, $124,000 for printing and mailing of
Prospectuses, $4,390,000 for support services, $3,401,000 to Smith Barney
Financial Consultants, and $3,016,000 in accruals for interest on the ex-
cess of Smith Barney expenses incurred in distributing the Fund's shares
over the sum of the distribution fees and CDSC received by Smith Barney
from the Fund. No comparable information is available for 1992, the year
that the variable pricing system was implemented.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the ex-
pense 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 C shares. In addition, the Fund pays Smith Bar-
ney a distribution fee with respect to the Class B and Class C shares pri-
marily intended to compensate Smith Barney for its initial expense of pay-
ing Financial Consultants a commission upon sales of those shares. Such
shares' distribution fees, which are accrued daily and paid monthly, are
calculated at the annual rate of 0.75% of the value of average daily net
assets attributable to the Class B and Class C shares with respect to Spe-
cial Equities Fund, 0.50% of the value of average daily net assets attrib-
utable to the Class B shares and 0.45% of the value of average daily net
assets attributable to Class C shares, with respect to Government Securi-
ties Fund and Investment Grade Bond Fund.
The following expenses were incurred during the periods indicated:
Sales Charges (paid to Smith Barney or Shearson Lehman Brothers, its pre-
decessor).
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL YEAR
NAME OF FUND THROUGH 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $15,635 $110,683 $114,571
Government Securities Fund 7,644 48,964 66,217
Special Equities Fund 867 172,978 186,104
</TABLE>
CDSC (paid to Smith Barney or Shearson Lehman Brothers, its predecessor).
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $381,975 $498,515 $556,007
Government Securities Fund 630,245 820,619 629,700
Special Equities Fund 45,234 73,089 288,013
</TABLE>
Service Fees
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL YEAR
NAME OF FUND THROUGH 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $184 $16,729 $147,152
Government Securities Fund 67 13,628 334,848
Special Equities Fund 36 22,380 147,488
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $177,932 $1,181,850 $ 922,038
Government Securities Fund 222,385 2,384,061 1,505,763
Special Equities Fund 30,545 226,964 329,007
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL YEAR
NAME OF FUND THROUGH 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $0 $148 $1,009
Government Securities Fund 0 255 967
Special Equities Fund 0 281 1,975
</TABLE>
Distribution Fees
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $2,953,493 $2,363,700 $1,844,077
Government Securities Fund 8,189,796 4,768,122 3,011,526
Special Equities Fund 669,436 680,894 987,022
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL YEAR
NAME OF FUND THROUGH 12/31/92 ENDED 12/31/93 ENDED 12/31/94
<S> <C> <C> <C>
Investment Grade Bond Fund $0 $295 $1,958
Government Securities Fund 0 510 1,893
Special Equities Fund 0 281 5,927
</TABLE>
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). 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
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Years's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ. The following is a de-
scription of the procedures used by the Funds in valuing its assets.
A security which is listed or traded on more than one exchange is valued
at the quotation on the exchange determined to be the primary market for
such security. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. dollar values at the mean be-
tween the bid and offered quotations of such currencies against U.S. dol-
lars as last quoted by any recognized dealer. If such quotations are not
available, the rate of exchange will be determined in good faith by the
Board of Directors. In carrying out the Board of Director's valuation pol-
icies, SBMFM, as administrator, or Boston Advisors, as sub-administrator,
may consult with an independent pricing service (the "Pricing Service")
retained by the Company.
Debt securities of United States issuers (other than U.S. government secu-
rities and short-term investments) are valued by SBMFM, as administrator,
or Boston Advisors, as sub-administrator, after consultation with the
Pricing Service approved by the Board of Directors. When, in the judgment
of the Pricing Service, quoted bid prices for investments are readily
available and are representative of the bid side of the market, these 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
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
class of other funds of the Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed 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 CDSC. Class B
shares of the Fund exchanged for Class B shares of another fund will be
subject to the higher applicable CDSC of the two funds and, for purposes
of calculating CDSC rates and conversion periods, will be deemed to have
been held since the date the shares being exchanged were deemed to be pur-
chased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
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 residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of
each fund into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are immedi-
ately invested at a price as described above, in shares of the fund being
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, a Fund may quote its yield or total return in adver-
tisements or in reports and other communications to shareholders. The Fund
may include comparative performance information in advertising or market-
ing the Fund's shares. Such performance information may include the fol-
lowing industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institu-
tional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent
any advertisement or sales literature of a Fund describes the expenses or
performance of a Class, it will also disclose such information for the
other Classes.
YIELD
A Fund's 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2[( a-b / cd +1)6 -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimburse-
ment).
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 purchased by the Fund at a discount or pre-
mium, the formula generally calls for amortization of the discount or pre-
mium; 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 the 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 Class A yields for the 30-day period ended December 31, 1994 for In-
vestment Grade Bond Fund and Government Securities Fund were 8.18% and
7.35%, respectively.
The Class B yields for the 30-day period ended December 31, 1994 for In-
vestment Grade Bond Fund and Government Securities Fund were 8.08% and
7.19%, respectively.
The Class C yields for the 30-day period ended December 31, 1994 for In-
vestment Grade Bond Fund and Government Securities Fund were 8.10% and
7.25%, respectively.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures, as described below, 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.
Class A's average annual total returns were as follows for the periods in-
dicated:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 6, 1992*
NAME OF FUND DECEMBER 31, 1994 THROUGH DECEMBER 31, 1994
<S> <C> <C>
Investment Grade Bond Fund (13.05)% 2.90%
Government Securities Fund (7.13) 2.49
Special Equities Fund (10.31) 13.26
<FN>
* The Funds commenced selling Class A shares on November 6, 1992.
</TABLE>
Class B's average annual total returns (reflecting the waiver of the
Fund's investment advisory, sub-investment advisory, administration and
distribution fees, when applicable) were as follows for the periods indi-
cated:
<TABLE>
<CAPTION>
FIVE YEAR TEN YEAR
YEAR ENDED PERIOD ENDED PERIOD ENDED
NAME OF FUND DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994(1)
<S> <C> <C> <C>
Investment Grade Bond Fund (13.10)% 7.75% 10.20%
Government Securities Fund (7.37) 6.84 8.12
Special Equities Fund (10.96) 7.87 9.73
<FN>
(1) Class B shares automatically convert to Class A shares eight years
after date of original purchase. Thus, a shareholder's actual return
for the ten years ended December 31, 1994 would be different than that
reflected above.
</TABLE>
If investment advisory, sub-investment advisory, administration and dis-
tribution fees had not been waived, Class B's average annual total return
for the same periods would have been the following:
<TABLE>
<CAPTION>
FIVE YEAR TEN YEAR
YEAR ENDED PERIOD ENDED PERIOD ENDED
NAME OF FUND DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994(1)
<S> <C> <C> <C>
Investment Grade Bond Fund N/A 7.74% 10.16%
Government Securities Fund N/A 6.80 8.09
Special Equities Fund N/A N/A 9.73
<FN>
(1) Class B shares automatically convert to Class A shares eight years
after date of original purchase. Thus, a shareholder's actual return
for the ten years ended December 31, 1994 would be different than that
reflected above.
</TABLE>
Class C's average annual total returns were as follows for the periods in-
dicated:
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS
NAME OF FUND 12/31/94 THROUGH 12/31/94
<S> <C> <C>
Investment Grade Bond Fund(1) (10.23)% (0.01)%
Government Securities Fund(2) (4.16) 2.01
Special Equities Fund(3) (7.21) (13.02)
<FN>
(1) The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 26, 1993.
(2) The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
(3) The Fund commenced selling Class C shares (previously designated as
Class D shares) on October 18, 1993.
</TABLE>
AGGREGATE TOTAL RETURN
Aggregate total return figures, as described below, represent the cumula-
tive change in the value of an investment in the Class for the specified
period and are computed by the following formula:
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.
Class A's aggregate total returns were as follows for the periods indi-
cated:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
ONE YEAR NOVEMBER 6, 1992* ONE YEAR NOVEMBER 6, 1992
PERIOD ENDED THROUGH PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
NAME OF FUND 1994** 1994** 1994*** 1994***
<S> <C> <C> <C> <C>
Investment Grade Bond Fund (8.95)% 11.36% (13.05)% 3.46%
Government Securities Fund (2.76) 10.41 (7.13) 2.56
Special Equities Fund (5.59) 37.38 (10.31) 27.77
<FN>
* The Funds commenced 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>
Class B's aggregate total returns were as follows for the periods indi-
cated:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR ONE YEAR FIVE YEAR TEN YEAR
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
NAME OF FUND 1994* 1994* 1994*(1) 1994** 1994** 1994**(1)
<S> <C> <C> <C> <C> <C> <C>
Investment Grade Bond
Fund (9.41)% 46.19% 164.07% (13.10)% 45.16% 164.07%
Government Securities
Fund (3.25) 40.20 118.37 (7.37) 39.20 118.37
Special Equities Fund (6.27) 47.03 153.15 (10.96) 47.03 153.15
<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 maximum applicable CDSC, if any.
(1) Class B shares automatically convert to Class A shares eight years
after date of original purchase. Thus, a shareholder's actual return
for the ten years ended December 31, 1994 would be different than that
reflected above.
</TABLE>
Class C's (formerly Class D) aggregate total returns were as follows for
the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
ONE YEAR COMMENCEMENT* ONE YEAR COMMENCEMENT*
PERIOD ENDED THROUGH PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
NAME OF FUND 1994** 1994** 1994*** 1994***
<S> <C> <C> <C> <C>
Investment Grade Bond Fund (9.41)% (0.01)% (10.23)% (0.01)%
Government Securities Fund (3.25) 3.87 (4.16) 3.87
Special Equities Fund (6.27) (15.43) (7.21) (15.43)
<FN>
* Investment Grade Bond Fund, Government Securities Fund and Special Eq-
uities Fund commenced selling Class C shares on February 26, 1993,
February 4, 1993 and October 18, 1993, respectively. Class C shares
are sold at net asset value without any sales charge or CDSC.
** Figures do not include the effect of the CDSC.
*** Figures include the effect of the applicable CDSC (1.00%).
</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.
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.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Company and its shareholders. The summary is not in-
tended as a substitute for individual tax advice, and investors are urged
to consult their tax advisors as to the tax consequences of an investment
in any Fund of the Company.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for Federal income
tax purposes.
Each Fund has qualified and the Company intends that each Fund will con-
tinue to qualify separately each year as a "regulated investment company"
under the Code. A qualified Fund will not be liable for Federal income
taxes to the extent that its taxable net investment income and net real-
ized capital gains are distributed to its shareholders, provided that each
Fund distributes at least 90% of its net investment 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 affect 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 and
Government Securities Fund) may be eligible for the dividends-received de-
duction 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 the 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 United States tax attributable to his or
her total foreign source taxable income. For this purpose, if the pass-
through election 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 securities generally will be treated as derived from United
States sources and certain currency fluctuation gains, including fluctua-
tion gains from foreign currency denominated debt securities, receivables
and payables, will be treated as ordinary income derived from United
States sources. The limitation on the foreign tax credit is applied sepa-
rately to foreign source passive income (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 ac-
crued 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 backup with-
holding tax is not an additional tax and may be credited against a share-
holder's regular federal income tax liability.
The foregoing discussion relates only to Federal income tax law as appli-
cable to United States citizens. 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 in-
come tax treatment. The Government Securities Fund's dividends, to the ex-
tent they consist of interest from obligations of the United States gov-
ernment and certain of its agencies and instrumentalities, may be exempt
from state and local income taxes in some jurisdictions. The Company in-
tends to advise shareholders of the proportion of that Fund's dividends
which are derived from such interest. Shareholders should consult their
tax advisors with respect to particular questions of Federal, state, local
and foreign taxation.
ADDITIONAL INFORMATION
The Company was incorporated on September 29, 1981 under the name Hutton
Investment Series Inc. The Company's corporate name was changed on Decem-
ber 29, 1988, July 30, 1993 and October 28, 1994, to SLH Investment Port-
folios Inc., Smith Barney Shearson Investment Funds Inc. and Smith Barney
Investment Funds Inc., respectively.
Boston Safe, an indirect, wholly owned subsidiary of Mellon, 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 is located at Exchange Place, Boston, Massachusetts 02109 and serves
as the Company's transfer agent. 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,
1994 accompany this Statement of Additional Information and are incorpo-
rated 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
INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
Smith Barney
INVESTMENT FUNDS INC.
SMITH BARNEY INVESTMENT GRADE BOND FUND
SMITH BARNEY GOVERNMENT SECURITIES FUND
SMITH BARNEY SPECIAL EQUITIES FUND
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1995
SMITH BARNEY
A Member of Travelers Group
STATEMENT OF ADDITIONAL INFORMATION
OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
DATED FEBRUARY 21, 1995
ANNUAL REPORT
OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994
PRO FORMA FINANCIAL STATEMENTS
SMITH BARNEY INVESTMENT FUNDS, INC. - GROWTH
OPPORTUNITY FUND
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is
incorporated by reference to "Liability of
Directors/Trustees" under the caption "Comparative
Information on Shareholders' Rights" in Part A of this
Registration Statement.
Item 16. Exhibits -- References are to
Registrant's Registration Statement on Form N-1A as filed
with the Securities and Exchange Commission on October 2,
1981 (File Nos. 2-74288 and 811-3275) (the "Registration
Statement")
(1) (a) Articles of Restatement of
Registrant dated September 17, 1993 are incorporated by
reference to Post-Effective Amendment No. 37 to the
Registration Statement filed on November 7, 1994 ("Post-
Effective Amendment No. 37").
(1) (b) Articles of Amendment to the
Articles of Incorporation dated October 14, 1994 is
incorporated by reference to Post-Effective Amendment No.
37 to the Registration Statement.
(1) (c) Certificate of Correction to
Articles of Incorporation dated October 28, 1994 is
incorporated by reference to Post-Effective Amendment No.
37 to the Registration Statement.
(1) (d) Articles of Amendment of Articles
of Incorporation dated October 28, 1994 is incorporated by
reference to Post-Effective Amendment No. 37 to the
Registration Statement.
(2) By-Laws, as amended on September 30,
1992 are incorporated by reference to Post-Effective
Amendment No. 30 to the Registration Statement.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization
(included as Exhibit A to Registrant's Prospectus/Proxy
Statement contained in Part A of this Registration
Statement).*
(5) Not Applicable.
(6) Management Agreement between Smith
Barney Inc. and the Registrant on behalf of Smith Barney
Growth Opportunity Fund will be filed by amendment.
(7) (a) Distribution Agreement dated July
30, 1993, between 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) (b) Amendment to Distribution
Agreement between Registrant and Smith Barney. Inc. on
behalf of Smith Barney Growth Opportunity Fund will be
filed by amendment.
(8) Not Applicable.
(9) (a) Custodian Agreement between
Registrant and PCN Bank, National Associates will be filed
by amendment.
(9) (b) Transfer Agency Agreement dated
August 5, 1993 between Registrant and The Shareholder
Services Group, Inc. ("TSSG") is incorporated by reference
to Post-Effective Amendment No. 31 to the Registration
Statement ("Post-Effective Amendment No. 31").
(9) (c) Supplement to the Transfer Agency
and Registrar Agreement between the Registrant and TSSG on
behalf of Smith Barney Growth Opportunity Fund will be
filed by amendment.
(10) (a) Plan of Distribution pursuant to
Rule 12b-1 is incorporated by reference to Post-Effective
Amendment No. 37 to the Registration Statement.
(11) Opinion and Consent of Willkie Farr &
Gallagher with respect to validity of shares.*
(12) Opinion and Consent of [Sullivan &
Worcester] with respect to tax matters.*
(13) Not Applicable.
(14) Consent of [Ernst & Young].*
(15) Not Applicable.
(16) Powers of Attorney (included on
Signature Page) are incorporated by reference to Post-
Effective Amendment No. 31.
(17) (a) Form of Proxy Card.*
(17)(b) Registrant's Declaration pursuant
to Rule 24f-2 is incorporated by reference to its initial
Registration Statement.
_________________
* Will be filed by amendment.
Item 17.Undertakings
(1) The undersigned Registrant agrees that prior to any
public reoffering of the securities registered through the
use of a prospectus which is a part of this Registration
Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, the reoffering prospectus will
contain the information called for by the applicable
registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every
prospectus that is filed under paragraph (1) above will be
filed as a part of an amendment to the Registration
Statement and will not be used until the amendment is
effective, and that, in determining any liability under
the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial
bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, as amended,
this Registration Statement has been signed on behalf of
the registrant, in the City of New York and State of New
York on the 9th day of March, 1995.
EXHIBIT INDEX
Exhibit Number Description Page
(4)* Agreement and Plan of
Reorganization (included as Exhibit A to Registrant's
Prospectus/Proxy Statement contained in Part A of this
Registration Statement).
(9) (b)** Form of Transfer Agency
Agreement between Registrant and The Shareholder Services
Group, Inc.
(11)** Opinion and Consent of
Willkie Farr & Gallagher with respect to validity of
shares.
(12)** Opinion and Consent of [Sullivan &
Worcester] with respect to tax matters.
(14)** Consent of [Ernst & Young].
(17) (a)* Form of Proxy Card.
_________________
* Filed herewith.
** To be filed by amendment.
FORM OF PROXY CARD
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
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COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
PROXY SOLICITED BY THE BOARD OF TRUSTEES
The undersigned holder of shares of Common Sense Trust -
Growth Opportunity Fund (the "Acquired Fund") , hereby
appoints [ ], attorneys and proxies for
the undersigned with full powers of substitution and
revocation, to represent the undersigned and to vote on
behalf of the undersigned all shares of the Acquired Fund
that the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Acquired Fund to be held at
the offices of the Acquired Fund, [ ]
on June 23, 1995 at [ ] and any adjournment or
adjournments thereof. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting and
Prospectus/Proxy Statement dated May --, 1995 and hereby
instructs said attorneys and proxies to vote said shares
as indicated herein. In their discretion, the proxies are
authorized to vote upon such other business as may
properly come before the Special Meeting. A majority of
the proxies present and acting at the Special Meeting in
person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of
the power and authority of said proxies hereunder. The
undersigned hereby revokes any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears on this
Proxy. If joint owners, EITHER may sign this Proxy. When
signing as attorney, executor, administrator, trustee,
guardian or corporate officer, please give your full
title.
Date:
Signature(s)(Title(s), if applicable)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
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Please indicate your vote by an "X" in the appropriate box
below. This proxy, if properly executed, will be voted in
the manner directed by the undersigned shareholder. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
PROPOSAL.
1.To approve the Agreement and Plan of Reorganization
FOR AGAINST ABSTAIN
dated as of [ ], 1995 providing for: (i) the
acquisition of all or substantially all of the assets of
Growth Opportunity Fund (the "Acquired Fund"),
a separate series of Common Sense
Trust by Smith Barney Growth
Opportunity Fund (the "Acquiring Fund"),
a separate series of Smith Barney
Investment Funds, Inc. in exchange
for Class A and Class B shares of Acquiring Fund and the
assumption by the Acquiring Fund of certain liabilities of
the Acquired Fund; (ii) the distribution of such shares of
the Acquiring Fund to shareholders of the Acquired Fund in
liquidation of the Acquired Fund; and (iii) the subsequent
termination of the Acquired Fund and cancellation of its
outstanding shares.
SIGNATURES
As required by Securities Act of 1933, as amended, this Registration
Statement has been
signed on behalf of the registrant, in the City of New York and State
of New York on the 9th
day of March, 1995.
SMITH BARNEY INVESTMENT
FUNDS INC.
on behalf of the GROWTH
OPPORTUNITY FUND
By: /s/ Heath B. McLendon*
[Heath B. McLendon]
Chairman of the Board
Investment Officer
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board 3/9/95
Heath B McLendon
/s/ Lewis E Daidone* Senior Vice President 3/9/95
Lewis E. Daidone and Treasurer
/s/ Paul R. Ades* Director 3/9/95
Paul R. Ades
/s/ Herbert Barg* Director 3/9/95
Herbert Barg
/s/ Dwight B. Crane* Director 3/9/95
Dwight B. Crane
/s/ Frank G. Hubbard* Director 3/9/95
Frank G. Hubbard
/s/ Allan R. Johnson* Director 3/9/95
Allan R. Johnson
/s/ Ken Miller* Director 3/9/95
Ken Miller
/s/ John F. White* Director 3/9/95
John F. White
*Signed by Lee D. Augsburger, their duly authorized attorney-in-fact,
pursuant to power of attorney dated November 3, 1994.
___________________
Lee D. Augsburger
GRWOPP.N14
GRWOPP.N14
GRWOPP.N14
GRWOPP.N14
GRWOPP.N14
