Registration No. 2-74288
811-3275
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 39 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended X
Amendment No. 41 X
SMITH BARNEY INVESTMENT FUNDS INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 723-9218
Christina T. Sydor
Secretary
SMITH BARNEY INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485(b)
X on March 1, 1995 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
__ on _____________ pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice for the
fiscal year ended December 31, 1994 will be filed on or about February 28,
1995.
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Valuation of Shares; Purchase of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8 Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not Applicable
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover page
11. Table of Contents
Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objectives and
Policies
Investment Objective and
Management Policies
14. Management of the Fund
Management of the Company;
Distributor
15. Control Persons and Principal
Holders
of Securities
Management of the Company
16. Investment Advisory and Other
Services
Management of the Company;
Distributor
17. Brokerage Allocation and
Other Services
Investment Objective and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing
of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A (Prospectus for Smith Barney European Fund) is incorporated by
reference to Post-Effective Amendment No. 36 as filed with the Securities
and Exchange Commission ("SEC") on June 23, 1994 and Part B (Statement of
Additional Information for Smith Barney European Fund ) is incorporated by
reference to Post-Effective Amendment No 37, as filed with the SEC on
November 7, 1994.
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Government
Securities
Fund
M A R C H 1 , 1 9 9 5
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- ---------------------------------------------------------------------------
PROSPECTUS MARCH 1, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Government Securities Fund (the "Fund") has an investment
objective of high current return through investments that are issued or
guaranteed by the United States government, its agencies or instrumentalities
("U.S. government securities"). It may write covered call options and secured
put options and purchase put options on U.S. government securities. For hedging
purposes, the Fund may purchase and sell interest rate futures contracts and put
and call options thereon.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Investment Funds Inc. (the
"Company"). The Company is an open-end management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference. Shares of other funds offered by the Company are
described in separate Prospectuses that may be obtained by calling the Company
at the telephone number set forth above or by contacting a Smith Barney
Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated March 1, 1995, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Company at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
----------------------------------------------------------------
VALUATION OF SHARES 24
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 24
----------------------------------------------------------------
PURCHASE OF SHARES 27
----------------------------------------------------------------
EXCHANGE PRIVILEGE 38
----------------------------------------------------------------
REDEMPTION OF SHARES 42
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 44
----------------------------------------------------------------
PERFORMANCE 45
----------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 46
----------------------------------------------------------------
DISTRIBUTOR 48
----------------------------------------------------------------
ADDITIONAL INFORMATION 49
----------------------------------------------------------------
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR
THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN ANY SUCH JURISDICTION.
2
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current return by investing in U.S. government
securities. The Fund may write covered call options and secured put options and
purchase put options on U.S. government securities. The Fund 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.
See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of the sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares, is
offered only to investors meeting an initial investment minimum of $5,000,000.
See "Purchase of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an
3
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
annual service fee of 0.25% and an annual distribution fee of 0.50% of the
average daily net assets of the Class. The Class B shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class B
shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges
4
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
and the shares are subject to lower ongoing expenses over the term of the
investment. As an investment alternative, Class B and Class C shares are sold
without any initial sales charge so the entire purchase price is immediately
invested in the Fund. Any investment return on these additional invested amounts
may partially or wholly offset the higher annual expenses of these Classes.
Because the Fund's future return cannot be predicted, however, there can be no
assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
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 initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed under
"Exchange Privilege." Class A share purchases may also be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing expenses of
Class A shares may be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
5
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Company and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The
6
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
minimum initial investment requirement for Class A, Class B and Class C shares
and the subsequent investment requirement for all Classes through the Systematic
Investment Plan described below is $50. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advisory and
management services to investment companies affiliated with Smith Barney. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subidiary of The Boston Company, Inc. ("TBC") which in turn is
an indirect wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See
"Management of the Company and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
7
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid on the last business day of the Smith Barney statement month.
Distributions of net realized long- and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they are
earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a PRO
RATA basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after a
short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The value
of the Fund's investments, and hence the net asset value of Fund shares, will
fluctuate in response to changes in interest rates and market and economic
conditions. The Fund may enter into interest rate futures contracts and put and
call options thereon for hedging purposes, which may be subject to certain risks
in addition to those inherent in investments in the underlying securities. The
Fund may also employ other investment techniques which involve certain other
risks, including entering into repurchase agreements and lending portfolio
securities. See "Investment Objective and Management Policies -- Additional
Investments."
8
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND EXPENSES
THAT AN INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF
THE FUND, BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE INCURRED
AT THE TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S
OPERATING EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 4.50% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.55% 0.55% 0.55% 0.55%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses*** 0.20 0.18 0.22 0.20
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TOTAL FUND OPERATING EXPENSES 1.00% 1.48% 1.47% .75%
-------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at net asset value
with no sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12
months.
**Upon conversion of Class B shares to Class A shares, such shares will no longer be subject to a
distribution fee. Class C shares do not have a conversion feature and, therefore, are subject to
an ongoing distribution fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated based on expenses incurred by the Class
A shares because Class Y shares were not available for purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum charges
imposed upon purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. Smith Barney also receives, with respect to Class B shares, an
annual 12b-1 fee of 0.75% of the value of average daily net assets of that
Class, consisting of a
9
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
0.50% distribution fee and a 0.25% service fee. For Class C shares, Smith Barney
receives an annual 12b-1 fee of 0.70% of the value of average daily net assets
of this Class, consisting of a 0.45% distribution fee and a 0.25% service fee.
"Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY
OR INDIRECTLY. THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT
THE LEVELS SET FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION
OF SHARES" AND "MANAGEMENT OF THE COMPANY AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
Class A $ 65 $ 75 $ 98 $ 162
Class B 60 77 91 164
Class C 25 46 80 176
Class Y 8 24 42 93
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A 55 75 98 162
Class B 15 47 81 164
Class C 15 46 80 176
Class Y 8 24 42 93
--------------------------------------------------------------------------------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL
REPORT DATED DECEMBER 31, 1994. THE INFORMATION SET OUT BELOW SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN
THE FUND'S ANNUAL REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT
OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/94 12/31/93+++ 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 10.01 $ 9.69 $ 9.56
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.52 0.81 0.10
Net realized and unrealized gain/(loss) on investments (0.80) 0.23 0.13
- -------------------------------------------------------------------------------------
Total from investment operations (0.28) 1.04 0.23
Distributions to shareholders:
Distributions from net investment income (0.49) (0.72) (0.08)
Distributions from capital (0.07) -- (0.02)
- -------------------------------------------------------------------------------------
Total distributions (0.56) (0.72) (0.10)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.17 $10.01 $ 9.69
- -------------------------------------------------------------------------------------
Total return+ (2.76)% 10.87% 2.41%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $482,404 $7,067 $ 275
Ratio of operating expenses to average net assets++ 1.00% 0.92% 0.68%**
Ratio of net investment income to average net assets 6.18% 7.76% 6.24%**
Portfolio turnover rate 276% 540% 426%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and does not reflect any applicable
sales charge.
++The annualized operating expense ratios exclude interest expense. The ratios including interest expense for
the years ended December 31, 1994 and 1993 and the period ended December 31, 1992 were 1.26%, 1.07% and
1.01%, respectively. Annualized expense ratio before voluntary waiver of fees by the investment adviser
(including interest expense) for the year ended December 31, 1993 was 1.12%.
+++Per share amounts have been calculated using the monthly average shares method, which more appropriately
presents the per share data for these years, since the use of the undistributed method does not accord with
results of operations for all classes of shares.
#Net investment income before voluntary waiver of fees by the investment adviser for the year ended December
31, 1993 was $0.71.
</TABLE>
11
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/94 12/31/93+++ 12/31/92* 12/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 10.01 $ 9.68 $ 9.81 $ 9.11
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.46 0.73 0.53 0.70
Net realized and unrealized gain/(loss)
on investments (0.78) 0.27 (0.02) 0.71
- -------------------------------------------------------------------------------------
Total from investment operations (0.32) 1.00 0.51 1.41
Distributions to shareholders:
Distributions from net investment income (0.45) (0.67) (0.53) (0.63)
Distributions in excess of net investment
income and net realized gain -- -- -- --
Distributions from net realized gains -- -- -- --
Distributions from capital (0.07) -- (0.11) (0.08)
- -------------------------------------------------------------------------------------
Total distributions (0.52) (0.67) (0.64) (0.71)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 9.17 $ 10.01 $ 9.68 $ 9.81
- -------------------------------------------------------------------------------------
Total return+ (3.25)% 10.45% 5.45% 16.28%
- -------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $172,705 $851,350 $1,046,921 $1,285,937
Ratio of operating expenses to average
net assets++ 1.48% 1.40% 1.45% 1.40%
Ratio of net investment income to average
net assets 5.69% 7.28% 5.47% 6.80%
Portfolio turnover rate 276% 540% 426% 326%
- -------------------------------------------------------------------------------------
<FN>
*Shares in existence prior to November 6, 1992 were designated as Class B shares.
+Total return represents aggregate total return for the period indicated and does not reflect any
applicable sales charge.
++The operating expense ratios exclude interest expense. The ratios including interest expense for
the years ended December 31, 1994, 1993 and 1992 were 1.74%, 1.55% and 1.71%, respectively.
Operating expense ratios before voluntary waiver of fees by the investment adviser and/or
distributor (including interest expense) for the years ended December 31, 1993, 1989 and 1988
were 1.61%, 1.52% and 1.53%, respectively.
+++Per share amounts have been calculated using the monthly average shares method, which more
appropriately presents the per share data for these periods, since use of the undistributed
method does not accord with results of operations for all classes of shares.
@Not covered by Coopers & Lybrand's report.
#Net investment income before voluntary waiver of fees by the investment adviser and/or distributor
for the years ended December 31, 1993, 1989 and 1988 were $0.72, $0.69 and $0.74, respectively.
</TABLE>
12
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88@ 12/31/87@ 12/31/86@ 12/31/85@
<S> <C> <C> <C> <C> <C>
$ 9.25 $ 8.75 $ 8.90 $ 10.41 $ 10.20 $ 10.01
-------------------------------------------------------------------------------------
0.68 0.70 0.75 0.51 0.84 0.90
(0.08) 0.53 (0.16) (1.06) 0.50 0.77
-------------------------------------------------------------------------------------
0.60 1.23 0.59 (0.55) 1.34 1.67
(0.68) (0.70) (0.74) (0.51) (0.84) (1.18)
-- -- -- (0.05) -- --
-- -- -- (0.40) (0.29) (0.30)
(0.06) (0.03) -- -- -- --
-------------------------------------------------------------------------------------
(0.74) (0.73) (0.74) (0.96) (1.13) (1.48)
-------------------------------------------------------------------------------------
$ 9.11 $ 9.25 $ 8.75 $ 8.90 $ 10.41 $ 10.20
-------------------------------------------------------------------------------------
6.99% 14.58% 6.75% (5.27)% 13.62% 18.30%
-------------------------------------------------------------------------------------
$1,521,016 $2,001,740 $2,735,974 $4,383,816 $6,072,390 $3,053,758
1.43% 1.40% 1.34% 1.64% 1.56% 1.67%
7.60% 7.79% 8.00% 6.44% 6.20% 8.60%
274% 352% 281% 249% 353% 457%
-------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94 12/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $10.01 $ 9.90
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.49 0.68
Net realized and unrealized gain/(loss) on investments (0.81) 0.04
- -------------------------------------------------------------------------------------
Total from investment operations (0.32) 0.72
Distributions to shareholders:
Distributions from net investment income (0.45) (0.61)
Distribution from capital (0.07) --
- -------------------------------------------------------------------------------------
Total distributions (0.52) (0.61)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.17 $10.01
- -------------------------------------------------------------------------------------
Total return+ (3.25)% 7.36%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 646 $ 213
Ratio of operating expenses to average net assets++ 1.47% 1.40%**
Ratio of net investment income to average net assets 5.71% 7.28%**
Portfolio turnover rate 276% 540%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class C shares (previously designated as Class D shares) on
February 4, 1993.
**Annualized.
+Total return represents aggregate total return for the period indicated.
++The annualized operating expense ratios exclude interest expense. The ratios including
interest expense for the year ended December 31, 1994 and the period ended December 31,
1993 were 1.72% and 1.55%. Annualized expense ratio before voluntary waiver of fees by the
investment adviser (including interest expense) for the period ended December 31, 1993 was
1.61%.
+++Per share amounts have been calculated using the monthly average shares method, which more
appropriately presents the per share data for these periods, since use of the
undistributed method does not accord with results of operations.
#Net investment income before voluntary waiver of fees by the investment adviser for the
period ended December 31, 1993 was $0.55.
</TABLE>
AS OF DECEMBER 31, 1994, NO CLASS Y SHARES HAD BEEN SOLD AND, ACCORDINGLY,
NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT THIS TIME FOR THAT CLASS.
14
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective may not be changed without a majority vote of
shareholders of the Fund. There can be no assurance that the Fund will achieve
its investment objective.
The investment objective of the Fund is high current return. The Fund seeks to
achieve its investment objective by investing primarily in U.S. government
securities. U.S. government securities are obligations of, or are guaranteed by,
the U.S. government, its agencies or instrumentalities. These include bills,
certificates of indebtedness, and notes and bonds issued by the United States
Treasury or by agencies or instrumentalities of the United States government.
Some United States government securities, such as Treasury bills and bonds, are
supported by the full faith and credit of the United States Treasury; others are
supported by the right of the issuer to borrow from the United States Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the United States government to
purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association and the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. Mortgage
participation certificates issued by the FHLMC generally represent ownership
interest in a pool of fixed-rate conventional mortgages. Timely payment of
principal and interest on these certificates is guaranteed solely by the issuer
of the certificates. Other investments of the Fund will include Government
National Mortgage Association Certificates ("GNMA Certificates") which are
mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the United States government. While the United States
government guarantees the payment of principal and interest on GNMA
Certificates, the market value of the securities is not guaranteed and will
fluctuate. The Fund may write covered call options and secured put options and
purchase put options on U.S. government securities. The Fund also purchases and
sells interest rate futures contracts, and purchases and sells put and call
options on futures contracts, as a means of hedging against changes in interest
rates.
The Fund may invest up to 5% of its net assets in U.S. government securities
for which the principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange
15
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
The Fund may borrow money (up to 25% of its total assets) to increase its
investments, thereby leveraging its portfolio and exaggerating the effect on net
asset value of any increase or decrease in the market value of the Fund's
securities. See "Leverage through Borrowing." The Fund may enter into repurchase
agreements, reverse repurchase agreements and firm commitment agreements and
"short sales against the box" and may lend its portfolio securities. The total
of the Fund's direct borrowing and borrowings in connection with entering into
reverse repurchase agreements will not exceed 33 1/3% of the Fund's total
assets. Except when in a temporary defensive investment position, the Fund
intends to maintain at least 65% of its assets invested in U.S. government
securities (including futures contracts and options thereon and options relating
to U.S. government securities).
The Fund's distributions may consist of interest income from U.S. government
securities, premiums from expired put and call options written by the Fund, net
gains from closing purchase and sale transactions in options, futures contracts
or related options, and net gains from sales of portfolio securities pursuant to
options or otherwise. The investments of the Fund involve certain special risks
set forth in the description of those techniques in this Prospectus and in the
Statement of Additional Information.
The value of securities in which the Fund invests (and therefore the Fund's
net asset value per share) generally will vary inversely with changes in
interest rates and also will fluctuate in response to other factors.
In making purchases of securities consistent with the above policies, the Fund
will be subject to the applicable restrictions referred to under "Investment
Restrictions" in the Statement of Additional Information.
16
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week),
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest. The
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SBMFM or Boston Advisors, acting under
the supervision of the Board of Directors, reviews on an ongoing basis the
creditworthiness and the value of the collateral of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential risks.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the
sale of a money market instrument by the Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a
segregated account consisting of U.S. government securities or cash or cash
equivalents to cover its obligations under reverse repurchase agreements with
broker-dealers (but not banks). The Fund will invest the proceeds in other money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. Under the Investment Company Act
of 1940, as amended (the "1940 Act"),
17
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
reverse repurchase agreements may be considered borrowings by the seller;
accordingly, the Fund will limit its investments in reverse repurchase
agreements and other borrowings to no more than 33 1/3% of its total assets.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES. Firm commitment
agreements and when-issued purchases call for the purchase of securities at an
agreed-upon price on a specified future date, and would be used, for example,
when a decline in the yield of securities of a given issuer is anticipated. The
Fund as purchaser assumes the risk of any decline in value of the security
beginning on the date of the agreement or purchase. The Fund will not use such
transactions for leveraging purposes, and accordingly will segregate U.S.
government securities, cash or cash equivalents in an amount sufficient to meet
its purchase obligations under the agreement.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and obtain
the return of the securities loaned; (c) the Fund will receive any interest or
dividends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of the
Fund.
SHORT SALES. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
OPTIONS ACTIVITIES. The Fund may write (I.E., sell) call options ("calls") if
the calls are "covered" throughout the life of the option. A call is "covered"
if the Fund owns the optioned securities, if the Fund maintains in a segregated
account with the Company's custodian cash, cash equivalents or U.S. government
securities with a value sufficient to meet its obligations
18
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
under the call, or if the Fund owns an offsetting call option. When the Fund
writes a call, it receives a premium and gives the purchaser the right to buy
the underlying security at any time during the call period (usually not more
than nine months in the case of common stock or fifteen months in the case of
U.S. government securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund foregoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase call options on securities. However, the
Fund may only purchase a call on securities to effect a "closing purchase
transaction," which is the purchase of a call covering the same underlying
security and having the same exercise price and expiration date as a call
previously written by the Fund on which it wishes to terminate its obligation.
The Fund also may write and purchase put options ("puts"). When the Fund
writes a put, it receives a premium and gives the purchaser of the put the right
to sell the underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. The Fund will not purchase puts on
securities if more than 10% of its net assets would be invested in premiums on
puts.
The Fund may write puts on securities 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 the
Fund will not exceed 50% of its net assets. The Fund also writes "straddles,"
which are combinations of secured puts and covered calls on the same 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 premium, 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
19
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 "Dividends,
Distributions and Taxes."
There can be no assurance that a liquid secondary market will exist at a given
time for any particular option. In this regard, it is difficult to predict to
what extent liquid markets will develop or continue. See below for a discussion
of the purchase by the Fund of options on futures contracts. See the Statement
of Additional Information for further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including risks involved in options trading on GNMA Certificates.
INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest 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. Futures contracts are traded on
designated "contracts markets" which, through their clearing corporations,
guarantee performance of the contracts. Currently, there are futures contracts
based on securities such as long-term Treasury bonds, Treasury notes, GNMA
Certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the 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 interest 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 the net asset value from
declining as much as it otherwise would have. Similarly, entering into futures
contracts for the purchase of securities has an effect similar to actual
purchase of the underlying securities, but permits the continued holding of
securities other than the underlying securities. For example, if SBMFM expects
long-term interest rates to decline, the Fund might enter into futures contracts
for the purchase of long-term securities, so
20
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
that it could gain rapid market exposure that may offset anticipated increases
in the cost of securities it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize.
The Fund also may purchase 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
option 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, the sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract in
the same manner as it purchases "protective puts" on securities. The purchase of
call options on interest rate futures contracts is intended to serve the same
purpose as the actual purchase of the futures contract, and the Fund will set
aside cash or cash equivalents sufficient to purchase the amount of portfolio
securities represented by the underlying futures contracts. See "Options
Activities" and "Dividends, Distributions and Taxes."
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 options, the Fund will
comply with rules and interpretations of the Commodity Futures Trading
Commission ("CFTC"), under which the Company is excluded from regulation as a
"commodity pool." CFTC regulations permit use of commodity futures and options
for bona fide hedging purposes without limitations on the amount of assets
committed to margin and option premiums.
The Fund will not engage in transactions involving futures contracts or
related options for speculation but only as a hedge against changes in the
market values of debt securities held, or intended to be purchased, by the Fund
and where the transactions are appropriate to reduction of the Fund's
21
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
risks. The Fund's futures transactions will be entered into for traditional
hedging 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 securities it is
committed to purchase.
There is no assurance that the Fund will be able to close out its futures
positions at any time, in which case it would be required to maintain the margin
deposits on the contract. There can be no assurance that hedging transactions
will be successful, as there may be an imperfect correlation (or no correlation)
between movements in the prices of the futures contracts and of the debt
securities being hedged, or price distortions due to market conditions in the
futures markets. Where futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the long-term market declines
and the Fund does not invest in long-term securities, the Fund would realize a
loss on the futures contracts, which would not be offset by a reduction in the
price of securities purchased. Where futures contracts are sold to hedge against
a decline in the price of the Fund's long-term securities but the long-term
market advances, the Fund would lose part or all of the benefit of the advance
due to offsetting losses in its futures positions.
FOREIGN CURRENCY RISKS. The Fund has the ability to invest up to 5% of its net
assets in U.S. government securities where the principal repayment amount may be
increased or decreased due to fluctuations of foreign currency exchange rates.
LEVERAGE THROUGH BORROWING. The Fund may borrow up to 25% of the value of its
net assets on an unsecured basis from banks to increase its holdings of
portfolio securities or to acquire securities to be placed in a segregated
account with the custodian for various purposes (e.g. to secure puts written by
the Fund). The Fund is required to maintain 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 fluctuations or otherwise, even if it is disadvantageous from
an investment standpoint. Leveraging will exaggerate the effect of any increase
or decrease in the value of portfolio securities
22
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
on the Fund's net asset value, and money borrowed will be subject to interest
costs (which may include commitment 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.
AMERICAN DEPOSITARY RECEIPTS. The Fund may purchase foreign securities and
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 publicly traded on exchanges or
over-the-counter in the United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable
commission rates. SBMFM may select brokers and dealers which provide it with
research services and may cause the Fund to pay such brokers and dealers
commissions which exceed those other brokers and dealers may have charged, if it
views the commissions as reasonable in relation to the value of the brokerage
and/or research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the Fund's securities, with money
market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for each
of the past fiscal years are set forth under "Financial Highlights."
23
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. United
States over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Securities for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors. Notwithstanding the above, bonds
and other fixed-income securities are valued by using market quotations and may
be valued on the basis of prices provided by a pricing service approved by the
Board of Directors.
When the Fund writes a put or call option, it records the premium received as
an asset and equivalent liability, and thereafter adjusts the liability to the
market value of the option determined in accordance with the preceding
paragraph. The premium paid for an option purchased by the Fund is recorded as
an asset and subsequently adjusted to market value.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
The Fund declares dividends daily consisting of estimated daily net investment
income, and pays dividends monthly. Any net realized gains, after utilization of
capital loss carryforwards, will be distributed at least annually,
24
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
and net realized short-term capital gains (including short-term capital gains
from options transactions, if any) may be paid more frequently, with the
distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends and capital gains will
be reinvested automatically in additional shares of the same Class at net asset
value subject to no sales charge or CDSC. Dividends and distributions are
treated the same for tax purposes whether taken in cash or reinvested in
additional shares. The per share dividends and distributions on Class B and
Class C shares may be lower than the per share dividends on Class A and Class Y
shares principally as a result of the distribution fee applicable with respect
to Class B and Class C shares. The per share dividends on Class A shares of the
Fund may be lower than the per share dividends on Class Y shares principally as
a result of the service fee applicable to Class A shares. Distributions of
capital gains, if any, will be in the same amount for Class A, Class B, Class C
and Class Y shares. In addition, as determined by the Board of Directors,
distributions of the Fund may include a return of capital. Shareholders will be
notified of the amount of any distribution that represents a return of capital.
In order to comply with a calendar year distribution requirement under the Code,
it may be necessary for the Fund to make distributions at times other than those
set forth above.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide basis.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Code. In any taxable year in which the Fund so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses), the Fund (but
not its shareholders) generally will be relieved of Federal income tax on the
investment company taxable income and net realized capital gains (the excess of
net long-term capital gains over net short-term capital losses), if any,
distributed to shareholders. In order to qualify as a regulated investment
company, the Fund will be required to meet various Code requirements.
25
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- ---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In order
to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital 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 Fund.
Dividends (including capital gains dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date in
such a month will be deemed to have been received by shareholders on December 31
of that calendar year, provided that the dividend is actually paid by the Fund
during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from U.S. government securities may be exempt from all
state and local income taxes. Shareholders should consult their tax advisors for
specific information on the tax consequences of particular types of
distributions.
26
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through TSSG. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or holds
shares.
Investors in Class A, Class B and Class C shares may open an account by making
an initial investment of at least $1,000 for each account, or $250 for an IRA or
a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares may
open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of Travelers and its subsidiaries,
including Smith Barney, Directors of the Company and their spouses and children.
The Fund reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the
27
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Company's transfer agent, TSSG. Share certificates
are issued only upon a shareholder's written request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular trading
on the NYSE, on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Orders received by
dealers or Introducing Brokers prior to the close of regular trading on the NYSE
on any day the Fund calculates its net asset value, are priced according to the
net asset value determined on that day, provided the order is received by Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day after the trade date
(the "settlement date"). The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995, the settlement date will
be the third business day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or TSSG is authorized through
preauthorized transfers of $50 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Fund
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information is
available from the Fund or a Smith Barney Financial Consultant.
28
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
SALES SALES DEALERS
CHARGE AS % CHARGE AS % REALLOWANCE AS %
AMOUNT OF INVESTMENT OF OFFERING PRICE OF AMOUNT INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71% 4.05%
$25,000 -- $49,999 4.00% 4.17% 3.60%
$50,000 -- $99,999 3.50% 3.63% 3.15%
$100,000 -- $249,999 2.50% 2.56% 2.25%
$250,000 -- $499,999 1.50% 1.52% 1.35%
$500,000 and over * * *
- -------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares offered with a
sales charge equal or exceed $500,000 in the aggregate, will be made at net asset value without any
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith Barney, which compensates Smith Barney
Financial Consultants and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and Class C shares is waived.
See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privileges."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to Directors
of the Company and employees of Travelers and its subsidiaries,
29
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
or the spouses and children of such persons (including the surviving spouse of a
deceased Director or employee, and retired Directors or employees), or sales to
any trust, pension, profit-sharing or other benefit plan for such persons
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
re-sold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company in connection with the combination of such company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are offered
with a sales charge equal to or greater than the maximum sales charge of the
Fund) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; and (e)
accounts managed by registered investment advisory subsidiaries of Travelers. In
order to obtain such discounts, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined above)
at a reduced sales charge or at net asset value determined by aggregating the
dollar amount of the new purchase and the total net asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney, which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification
30
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
that the purchase qualifies for the reduced sales charge. The right of
accumulation is subject to modification or discontinuance at any time with
respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order
31
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
to obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13 month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13 month period starting up to 90
days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sale charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. Please contact a Smith Barney Financial
Consultant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares, which when combined with Class A shares offered
with a sales charge currently held by an investor, equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time
32
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gains distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of years
since a purchase payment, all purchase payments made during a month will be
aggregated and deemed to have been made on the last day of the preceding Smith
Barney statement month. The following table sets forth the rates of the charge
for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of Shares --
Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the
33
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
total number of Class B shares (other than Class B Dividend Shares) owned by the
shareholder. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July 15,
1994 and who subsequently exchange those shares for Class B shares of the Fund
will be offered the opportunity to exchange all such Class B shares for Class A
shares of the Fund four years after the date on which those shares were deemed
to have been purchased. Holders of such Class B shares will be notified of the
pending exchange in writing approximately 30 days before the fourth anniversary
of the purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Prospectus
Summary -- Alternative Purchase Arrangements -- Class B Shares Conversion
Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gains distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12 per
share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
34
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see below) (provided, however, that automatic cash withdrawals in amounts equal
to or less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with a
combination of the Fund with any investment company by merger, acquisition of
assets or otherwise. In addition, a shareholder who has redeemed shares from
other funds of the Smith Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within 60 days and receive PRO
RATA credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the
35
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Class A, Class B and Class C shares acquired by other investors. Similar to
those available to other investors, Class Y shares acquired through the Smith
Barney 401(k) Program are not subject to any initial sales charge, CDSC or
service or distribution fee. Once a Participating Plan has made an initial
investment in the Fund, all of its subsequent investments in the Fund must be in
the same Class of shares, except as otherwise described below.
CLASS A SHARES. Class A shares of the Fund are offered without any initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. Such Plans will be notified of the
pending exchange in writing approximately 60 days before the eighth anniversary
of the enrollment date and, unless the exchange has been rejected in writing,
the exchange will occur on or about the eighth anniversary date. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
36
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 will be subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program if its total Class C holdings equal at least $500,000 as of the calendar
year-end, the Participating Plan will be offered the opportunity to exchange all
of its Class C shares for Class A shares of the Fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year, and unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan that purchases
$5,000,000 or more of Class Y shares of one or more funds of the Smith Barney
Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gains
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the
37
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Smith Barney 401(k) Program, unlike the applicability of the CDSC to other
shareholders, which depends on the number of years since those shareholders made
the purchase payment from which the amount is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
---------------------------------------------------------------------------------
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
</TABLE>
38
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utilities Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
TAXABLE FIXED-INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
TAX-EXEMPT FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
</TABLE>
39
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
INTERNATIONAL FUNDS
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
<FN>
- ------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A, Class B and Class Y shares of the Fund.
In addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares of
this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to
40
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
the appropriate "sales charge differential" upon the exchange of such shares for
Class A shares of a fund sold with a higher sales charge. The "sales charge
differential" is limited to a percentage rate no greater than the excess of the
sales charge rate applicable to purchases of shares of the mutual fund being
acquired in the exchange over the sales charge rate(s) actually paid on the
mutual fund shares relinquished in the exchange and on any predecessor of those
shares. For purposes of the exchange privilege, shares obtained through
automatic reinvestment of dividends and capital gains distributions, are treated
as having paid the same sales charges applicable to the shares on which the
dividends or distributions were paid; however, except in the case of the Smith
Barney 401(k) Program, if no sales charge was imposed upon the initial purchase
of shares, any shares obtained through automatic reinvestment will be subject to
a sales charge differential upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a higher CDSC than that imposed by the Fund, the exchanged Class B
shares will be subject to the higher applicable CDSC. Upon an exchange, the new
Class B shares will be deemed to have been purchased on the same date as the
Class B shares of the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. SBMFM may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, SBMFM will notify
Smith Barney and Smith Barney may, at its discretion, decide to limit additional
purchases and/or exchanges by a shareholder.
41
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Upon such a determination, Smith Barney will provide notice in writing or by
telephone to the shareholder at least 15 days prior to suspending the exchange
privilege and during the 15 day period the shareholder will be required to (a)
redeem his or her shares in the Fund or (b) remain invested in the Fund or
exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the
42
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
shareholder's account is not with Smith Barney, from the shareholder directly.
The redemption proceeds will be remitted on or before the seventh day following
receipt of proper tender, except on any days on which the NYSE is closed or as
permitted under the 1940 Act in extraordinary circumstances. The Fund
anticipates that, in accordance with regulatory changes, beginning on or about
June 1, 1995, payment will be made on the third business day after receipt of
proper tender. Generally, if the redemption proceeds are remitted to a Smith
Barney brokerage account, these funds will not be invested for the shareholder's
benefit without specific instruction and Smith Barney will benefit from the use
of temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Government Securities Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power must be
guaranteed by an eligible guarantor institution such as a domestic bank, savings
and loan institution, domestic credit union, member bank of the Federal Reserve
System or member firm of a national securities exchange. TSSG may require
additional supporting
43
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the shareholder's shares subject to the CDSC.) For further
information regarding the automatic cash withdrawal plan, shareholders should
contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
44
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
and Class Y shares of the Fund. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Total return is computed
for a specified period of time assuming deduction of the maximum sales charge,
if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a
45
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
Class' current return to yields published for other investment companies and
other investment vehicles. The Fund may also include comparative performance
information in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, or other industry
publications. The Fund will include performance data for Class A, Class B, Class
C and Class Y shares in any advertisement or information including performance
data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services to the
Company and the Fund, including agreements with its distributor, investment
adviser, administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the investment advisory
agreement effective November 7, 1994, from its affiliate Mutual Management Corp.
(Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Holdings.) Investment advisory services continue to be provided to the Fund by
the same portfolio managers who had provided services under the agreement with
Mutual Management Corp. SBMFM (through predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of January 31, 1995 in excess of $51.9
billion.
46
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a fee at the
following annual rates of average daily net assets: 0.35% up to $2 billion,
0.30% of the next $2 billion, 0.25% of the next $2 billion, 0.20% of the next $2
billion and 0.15% of net assets thereafter. For the fiscal year ended December
31, 1994, SBMFM was paid investment advisory fees equal to 0.35% of the value of
the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
James E. Conroy, Managing Director of SBMFM, has served as First Vice
President and Investment Officer of the Fund since the Fund's commencement of
operations (March 20, 1984) and manages the day-to-day operations of the Fund,
including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1994 is included in
the Fund's Annual Report dated December 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays SBMFM
a fee at the annual rate of 0.20% of the value of the Fund's average daily net
assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides
47
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
investment management, investment advisory, administrative and/or sub-
administrative services to investment companies that had aggregate assets under
management as of January 31, 1995, in excess of $69.7 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 5, 1994, 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. Prior
to May 5, 1994, Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class B and Class C shares at the
annual rate of 0.50% and 0.45%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no longer be
subject to distribution fees. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
48
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale with respect to Class A, Class B and Class C shares, and a
continuing fee for servicing shareholder accounts for as long as a share-
holder remains a holder of that Class. Smith Barney Financial Consultants may
receive different levels of compensation for selling different Classes of
shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Company's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, C
and Y, with a par value of $.001 per share. Each Class of shares has the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
49
<PAGE>
SMITH BARNEY
GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and serves
as custodian of the Company's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Company's transfer agent.
The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's
outstanding shares and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate fractional vote for any fractional share held of that Class.
Generally, shares of the Company will be voted on a Company-wide basis on all
matters except matters affecting only the interests of one Fund or one Class of
shares.
The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having
multiple accounts (I.E., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their account should contact their Smith
Barney Financial Consultants or TSSG.
50
<PAGE>
[LOGO]
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
388 Greenwich Street
New York, New York 10013
Fund 105, 177, 212, 458
FD 0232 C5
[LOGO]
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Special
Equities
Fund
M A R C H 1 , 1 9 9 5
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- ---------------------------------------------------------------------------
PROSPECTUS MARCH 1, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Special Equities Fund ("the Fund") has an investment objective of
long-term capital appreciation by investing in a diversified, managed portfolio
of common stocks or securities convertible into or exchangeable for common
stocks, primarily of secondary growth companies as identified by the Fund's
investment adviser.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Investment Funds Inc. (the
"Company"). The Company is an open-end management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference. Shares of other funds offered by the Company are
described in separate Prospectuses that may be obtained by calling the Company
at the telephone number set forth above or by contacting a Smith Barney
Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated March 1, 1995, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Company at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
----------------------------------------------------------------
VALUATION OF SHARES 19
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
----------------------------------------------------------------
PURCHASE OF SHARES 22
----------------------------------------------------------------
EXCHANGE PRIVILEGE 33
----------------------------------------------------------------
REDEMPTION OF SHARES 37
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 39
----------------------------------------------------------------
PERFORMANCE 39
----------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 40
----------------------------------------------------------------
DISTRIBUTOR 42
----------------------------------------------------------------
ADDITIONAL INFORMATION 43
----------------------------------------------------------------
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR
THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN ANY SUCH JURISDICTION.
2
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks long-term capital appreciation by investing in equity
securities consisting of common stocks or securities which are convertible into
or exchangeable for such stocks, including warrants, which the investment
adviser believes to have superior appreciation potential. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of the sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares, is
offered only to investors meeting an initial investment minimum of $5,000,000.
See "Purchase of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
3
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class B
shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional
4
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
invested amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
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 initial sales charge, but will be subject
to a CDSC of 1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate investment may be met by adding the purchase to the net asset
value of all Class A shares held in funds sponsored by Smith Barney Inc. ("Smith
Barney") listed under "Exchange Privilege." Class A share purchases may also be
eligible for a reduced initial sales charge. See "Purchase of Shares." Because
the ongoing expenses of Class A shares may be lower than those for Class B and
Class C shares, purchasers eligible to purchase Class A shares at net asset
value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
5
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
See "Purchase of Shares" and "Management of the Company and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $50. See
"Purchase of Shares."
6
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advisory and
management services to investment companies affiliated with Smith Barney. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subsidiary of The Boston Company, Inc. ("TBC") which in turn
is an indirect wholly owned subsidiary of Mellon Bank Corporation ("Mellon").
See "Management of the Company and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and
distributions of net realized capital gains, if any, are declared and paid
annually. See "Dividends, Distributions and Taxes."
7
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a PRO
RATA basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after a
short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The Fund
may employ investment techniques which involve certain risks, including entering
into repurchase agreements, lending portfolio securities, investing in
restricted securities, selling securities short and investing in foreign
securities through the use of American Depositary Receipts. See "Investment
Objective and Management Policies -- Additional Investments."
8
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND EXPENSES
THAT AN INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF
THE FUND, BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE INCURRED
AT THE TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S
OPERATING EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 5.00% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25% 1.00% 1.00% None
Other expenses*** 0.49% 0.46% 0.40% 0.49%
-------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.49% 2.21% 2.15% 1.24%
-------------------------------------------------------------------------------------
<FN>
*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 within 12 months.
**Upon conversion of Class B shares to Class A shares, such shares will no longer be subject to a
distribution fee. Class C shares do not have a conversion feature and, therefore, are subject to
an ongoing distribution fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated based on expenses incurred by the Class
A shares because Class Y shares were not available for purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum charges
imposed upon purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether shares are held through the Smith Barney 401(k) Program. See
"Purchase of Shares" and "Redemption of Shares." Smith Barney receives an annual
12b-1 service fee of 0.25% of the value of average daily net assets of Class A
shares. Smith Barney also receives, with respect to Class B and Class C shares,
an annual 12b-1 fee of 1.00% of the value of average daily net assets of the
respective Class,
9
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
consisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN UNDERSTANDING
THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY.
THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES" AND
"MANAGEMENT OF THE COMPANY AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
Class A $64 $ 95 $127 $219
Class B 72 99 128 236
Class C 32 67 115 248
Class Y 13 39 68 150
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A 64 95 127 219
Class B 22 69 118 236
Class C 22 67 115 248
Class Y 13 39 68 150
--------------------------------------------------------------------------------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at the end
of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL
REPORT DATED DECEMBER 31, 1994. THE INFORMATION SET OUT BELOW SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN
THE FUND'S ANNUAL REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT
OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/94# 12/31/93# 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $20.23 $15.47 $14.13
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.13) (0.08) (0.01)
Net realized and unrealized gain/(loss) on
investments (1.00) 5.17 1.35
- -------------------------------------------------------------------------------------
Total from investment operations (1.13) 5.09 1.34
- -------------------------------------------------------------------------------------
Distributions from net realized gains -- (0.33) --
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $19.10 $20.23 $15.47
- -------------------------------------------------------------------------------------
Total return+ (5.59)% 32.90% 9.48%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $101,052 $50,121 $ 195
Ratio of expenses to average net assets 1.49% 1.67% 1.51%**
Ratio of net investment loss to average net
assets (0.94)% (0.46)% (0.97)%**
Portfolio turnover rate 123% 112% 211%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and does not
reflect any applicable sales charge.
#Per share amounts have been calculated using the monthly average shares method, which more
appropriately presents per share data for this year since use of the undistributed income
methods did not accord with results of operations.
</TABLE>
11
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/94# 12/31/93# 12/31/92* 12/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 20.08 $ 15.47 $ 14.18 $ 9.82
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) (0.27) (0.20) (0.26) (0.07)
Net realized and unrealized gain/(loss) on
investments (0.99) 5.14 1.55 4.46
- -------------------------------------------------------------------------------------
Total from investment operations (1.26) 4.94 1.29 4.39
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income -- -- -- --
Distributions from net realized gains -- (0.33) -- --
Distributions from capital -- -- -- (0.03)
- -------------------------------------------------------------------------------------
Total distributions 0.00 (0.33) 0.00 (0.03)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 18.82 $ 20.08 $ 15.47 $ 14.18
- -------------------------------------------------------------------------------------
Total return+ (6.27)% 31.93% 9.10% 44.76%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $ 93,920 $138,401 $78,130 $81,618
Ratio of expenses to average net assets 2.21% 2.34% 2.32% 2.31%
Ratio of net investment income/(loss) to
average net assets (1.66)% (1.13)% (1.77)% (0.74)%
Portfolio turnover rate 123% 112% 211% 379%
- -------------------------------------------------------------------------------------
<FN>
*On November 6, 1992, the Fund commenced selling Class A shares. All shares previously in
existence were designated as Class B shares.
**Annualized expense ratio before reimbursement of expenses by investment adviser and
sub-investment adviser and administrator for the year ended December 31, 1988 was 2.39%.
+Total return represents aggregate total return for the period indicated and does not
reflect any applicable sales charge.
++Net investment income before reimbursement of expenses by investment adviser and
sub-investment adviser and administrator for the year ended December 31, 1988 was $0.70.
+++Not covered by Coopers & Lybrand's report.
#Per share amounts have been calculated using the monthly average shares method, which
more appropriately presents per share data for this year since use of the undistributed
income methods did not accord with results of operations.
</TABLE>
12
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88+++ 12/31/87+++ 12/31/86+++ 12/31/85+++
<S> <C> <C> <C> <C> <C>
$ 13.77 $ 12.04 $ 11.48 $ 13.02 $ 13.15 $ 9.94
--------------------------------------------------------------------
0.29 0.28 0.71++ (0.10) (0.05) 0.05
(3.70) 1.96 0.70 (1.30) 0.97 3.37
--------------------------------------------------------------------
(3.41) 2.24 1.41 (1.40) 0.92 3.42
--------------------------------------------------------------------
(0.29) (0.27) (0.55) -- (0.05) (0.21)
(0.23) -- (0.30) (0.14) (1.00) --
(0.02) (0.24) -- -- -- --
--------------------------------------------------------------------
(0.54) (0.51) (0.85) (0.14) (1.05) (0.21)
--------------------------------------------------------------------
$ 9.82 $ 13.77 $ 12.04 $ 11.48 $ 13.02 $ 13.15
--------------------------------------------------------------------
(24.71)% 18.60% 12.60% (10.91)% 7.05% 35.17%
--------------------------------------------------------------------
$76,009 $141,630 $169,983 $178,905 $214,419 $163,468
2.30% 2.34% 2.32%** 2.09% 2.12% 2.20%
%
2.12 1.69% 5.23% (0.63)% (0.34)% 0.43%
372% 228% 165% 148% 114% 146%
--------------------------------------------------------------------
</TABLE>
13
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94# 12/31/93*#
<S> <C> <C>
Net Asset Value, beginning of period $20.08 $ 22.62
- -------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.25) (0.16)
Net realized and unrealized loss on investments (1.01) (2.05)
- -------------------------------------------------------------------------------
Total from investment operations (1.26) (2.21)
Less distributions:
Distributions from net investment income -- (0.33)
- -------------------------------------------------------------------------------
Net Asset Value, end of period $18.82 $ 20.08
- -------------------------------------------------------------------------------
Total return+ (6.27)% (9.77)%
- -------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,528 $ 185
Ratio of expenses to average net assets 2.15% 2.19%**
Ratio of net investment loss to average net
assets (1.60)% (0.98)%**
Portfolio turnover rate 123% 112%
- -------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class C shares (previously designated as Class D
shares) on October 18, 1993.
**Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
#Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year since
use of the undistributed income methods did not accord with results of
operations.
</TABLE>
AS OF DECEMBER 31, 1994, NO CLASS Y SHARES HAD BEEN SOLD AND, ACCORDINGLY, NO
COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT THIS TIME FOR THAT CLASS.
14
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long-term capital appreciation. It seeks to
achieve this objective by investing in equity securities (common stocks or
securities which are convertible into or exchangeable for such stocks, including
warrants) which SBMFM believes to have superior appreciation potential. There
can be no assurance that the Fund will achieve its investment objective.
The Fund invests primarily in equity securities of secondary growth companies,
generally not within the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), as identified by SBMFM. These companies may not have reached a fully
mature stage of earnings growth, since they may still be in the developmental
stage, or may be older companies which 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, including health care related sectors, and may have
annual sales of less than $300 million. The Fund may also choose to invest in
some relatively unseasoned stocks, I.E., securities issued by companies whose
market capitalization is under $100 million.
Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase agreements
for temporary defensive purposes, lend its portfolio securities and enter into
short sales "against the box."
In making purchases of securities consistent with the above policies, the Fund
will be subject to the applicable restrictions referred to under "Investment
Restrictions" in the Statement of Additional Information. These restrictions and
the Fund's investment objective are fundamental policies, which means that they
may not be changed without a majority vote of shareholders of the Fund. Except
for the objective and those restrictions specifically identified as fundamental,
all investment policies and practices described in this Prospectus and in the
Statement of Additional Information are non-fundamental, so that the Board of
Directors may change them without shareholder approval. The fundamental
restrictions applicable to the Fund include a prohibition on (a) purchasing a
security if, as a result, more than 5% of the assets of the Fund would be
invested in the securities of the
15
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
issuer (with certain exceptions) or the Fund would own more than 10% of the
outstanding voting securities of the issuer, (b) investing more than 10% of the
Fund's total assets in "illiquid" securities (which includes repurchase
agreements with more than seven days to maturity), and (c) investing more than
25% of the Fund's total assets in the securities of issuers in a particular
industry (with exceptions for U.S. government securities and certain money
market instruments).
ADDITIONAL INVESTMENTS
U.S. GOVERNMENT SECURITIES. U.S. government securities are obligations of, or
are guaranteed by, the U.S. government, its agencies or instrumentalities. These
include bills, certificates of indebtedness, and notes and bonds issued by the
United States Treasury or by agencies or instrumentalities of the United States
government. Some U.S. government securities, such as United States Treasury
bills and bonds, are supported by the full faith and credit of the United States
Treasury; others are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the United States
government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association and the Federal Home Loan Mortgage
Corporation ("FHLMC"), are supported only by the credit of the instrumentality.
Mortgage participation certificates issued by the FHLMC generally represent
ownership interests in a pool of fixed-rate conventional mortgages. Timely
payment of principal and interest on these certificates is guaranteed solely by
the issuer of the certificates. Other investments will include Government
National Mortgage Association Certificates ("GNMA Certificates"), which are
mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the United States government. While the United States
government guarantees the payment of principal and interest on GNMA
Certificates, the market value of the securities is not guaranteed and will
fluctuate.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an
16
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject 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 restrictions upon the Fund's ability to dispose of
the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the agreement.
SBMFM or Boston Advisors, acting under the supervision of the Board of
Directors, reviews on an ongoing basis to evaluate potential risks, the value of
the collateral and the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and obtain
the return of the securities loaned; (c) the Fund will receive any interest or
dividends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of the
Fund.
SHORT SALES. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
17
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
AMERICAN DEPOSITARY RECEIPTS. 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 publicly traded on exchanges or over-the-counter in the
United States.
RESTRICTED SECURITIES. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual
restrictions on their resale. Such restrictions might prevent the sale of
restricted securities at a time when such a sale would otherwise be desirable.
Restricted securities and securities for which there is no readily available
market ("illiquid assets") will not be acquired if such acquisition would cause
the aggregate value of illiquid assets and restricted securities to exceed 10%
of the Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable
commission rates. SBMFM may select brokers and dealers which provide it with
research services and may cause the Fund to pay such brokers and dealers
commissions which exceed those other brokers and dealers may have charged, if it
views the commissions as reasonable in relation to the value of the brokerage
and/or research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the Fund's securities, with money
market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for each
of the past fiscal years are set forth under "Financial Highlights."
18
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that when
an occurrence subsequent to the time a foreign security is valued is likely to
have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each day. Unlisted foreign securities are
valued at the mean between the last available bid and offer price prior to the
time of valuation. Any assets or liabilities initially expressed in terms of
foreign currencies will be converted into U.S. dollar values at the mean between
the bid and offered quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer. Securities for which market quotations are not
readily available are valued at fair value. Notwithstanding the above, bonds and
other fixed-income securities are valued by using market quotations and may be
valued on the basis of prices provided by a pricing service approved by the
Board of Directors.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
19
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund's policy is to distribute its investment income (that is, its income
other than its net realized capital gains) and net realized capital gains, if
any, once a year, normally at the end of the year in which earned or at the
beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed
ordinary income or capital gains and expects to pay any other dividends and
distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be lower
than the per share dividends on Class A and Class Y shares principally as a
result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, Class B, Class C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide basis.
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code. In any taxable year in which the Fund so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses), the Fund (but
not its shareholders) generally will be relieved of Federal income tax on the
investment company taxable income and net realized capital gains (the excess of
net long-term capital
20
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
gains over net short-term capital losses), if any, distributed to shareholders.
In order to qualify as a regulated investment company, the Fund will be required
to meet various Code requirements.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital 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 Fund.
Dividends (including capital gains dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date in
such a month will be deemed to have been received by shareholders on December 31
of that calendar year, provided that the dividend is actually paid by the Fund
during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from U.S. government securities may be exempt from all
state and local income taxes. Shareholders should consult their tax advisors for
specific information on the tax consequences of particular types of
distributions.
21
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through TSSG. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or holds
shares.
Investors in Class A, Class B and Class C shares may open an account by making
an initial investment of at least $1,000 for each account, or $250 for an IRA or
a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares may
open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $50. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Directors of the Company and their spouses
and children. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account by
the Company's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
22
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Purchase orders received by Smith Barney prior to the close of regular trading
on the NYSE, on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Orders received by
dealers or Introducing Brokers prior to the close of regular trading on the NYSE
on any day the Fund calculates its net asset value, are priced according to the
net asset value determined on that day, provided the order is received by Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day after the trade date
(the "settlement date"). The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995, the settlement date will
be the third business day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or TSSG is authorized through
preauthorized transfers of $50 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Fund
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information is
available from the Fund or a Smith Barney Financial Consultant.
23
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
DEALERS
REALLOWANCE
AS
SALES CHARGE AS SALES CHARGE AS % OF
% OF % OF AMOUNT OFFERING
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Less than $25,000 5.00% 5.26% 4.50%
$25,000 -- $49,999 4.00% 4.17% 3.60%
$50,000 -- $99,999 3.50% 3.63% 3.15%
$100,000 -- $249,999 3.00% 3.09% 2.70%
$250,000 -- $499,999 2.00% 2.04% 1.80%
$500,000 and over * * *
- -------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 in the aggregate, will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same circumstances in
which the CDSC applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to Directors
of the Company and employees of Travelers and its subsidiaries, or the spouses
and children of such persons (including the surviving spouse
24
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
of a deceased Director or employee, and retired Directors or employees), or
sales to any trust, pension, profit-sharing or other benefit plan for such
persons provided such sales are made upon the assurance of the purchaser that
the purchase is made for investment purposes and that the securities will not be
re-sold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company in connection with the combination of such company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are offered
with a sales charge equal to or greater than the maximum sales charge of the
Fund) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; and (e)
accounts managed by registered investment advisory subsidiaries of Travelers. In
order to obtain such discounts, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined above)
at a reduced sales charge or at net asset value determined by aggregating the
dollar amount of the new purchase and the total net asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney which are offered with
a sales charge listed under "Exchange Privilege" then held by such person and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
25
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
26
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13 month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13 month period starting up to 90
days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. Please contact a Smith Barney Financial
Consultant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gains distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
27
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of years
since a purchase payment, all purchase payments made during a month will be
aggregated and deemed to have been made on the last day of the preceding Smith
Barney statement month. The following table sets forth the rates of the charge
for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of Shares --
Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of Class B shares (other than Class B Dividend Shares) owned by the
shareholder. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July 15,
1994 and who subsequently exchange those shares for Class B shares of the Fund
will be offered the opportunity to exchange all such Class B shares for Class A
shares of the Fund four years after the date on which those shares were deemed
to have been purchased. Holders of such Class B shares will be notified of the
pending exchange in writing approximately 30 days before the fourth anniversary
of the purchase date
28
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the fourth anniversary date. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gains distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12 per
share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see below) (provided, however, that automatic cash withdrawals in amounts equal
to or less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with a
combination of the Fund
29
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive PRO RATA credit for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. Once a Participating
Plan has made an initial investment in the Fund, all of its subsequent
investments in the Fund must be in the same Class of shares, except as otherwise
described below.
CLASS A SHARES. Class A shares of the Fund are offered without any initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
30
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. Such Plans will be notified of the
pending exchange in writing approximately 60 days before the eighth anniversary
of the enrollment date and, unless the exchange has been rejected in writing,
the exchange will occur on or about the eighth anniversary date. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 will be subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program if its total Class C holdings equal at least $500,000 as of the calendar
year-end, the Participating Plan will be offered the opportunity to exchange all
of its Class C shares for Class A shares of the Fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year, and unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
31
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fee, sales charge or CDSC to any Participating Plan that purchases
$5,000,000 or more of Class Y shares of one or more funds of the Smith Barney
Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gains
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
32
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- ---------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Telecommunications Growth Fund
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utilities Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
TAXABLE FIXED-INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
</TABLE>
33
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
TAX-EXEMPT FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
INTERNATIONAL FUNDS
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
</TABLE>
34
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
<FN>
------------------------
*Available for exchange with Class A, Class C and Class Y shares of the Fund.
**Available for exchange with Class A, Class B and Class Y shares of the Fund.
In addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares of
this fund.
***Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the Fund.
++Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of a fund sold
with a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of dividends
and capital gains distributions, are treated as having paid the same sales
charges applicable to the shares on which the dividends or distributions were
paid; however, except in the case of the Smith Barney 401(k) Program, if no
sales charge was imposed upon the initial purchase of shares, any shares
obtained through automatic reinvestment will be subject to a sales charge
differential upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her
35
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
shares in any of the funds imposing a higher CDSC than that imposed by the Fund,
the exchanged Class B shares will be subject to the higher applicable CDSC. Upon
an exchange, the new Class B shares will be deemed to have been purchased on the
same date as the Class B shares of the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. SBMFM may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, SBMFM will notify
Smith Barney and Smith Barney may, at its discretion, decide to limit additional
purchases and/or exchanges by a shareholder. Upon such a determination, Smith
Barney will provide notice in writing or by telephone to the shareholder at
least 15 days prior to suspending the exchange privilege and during the 15 day
period the shareholder will be required to (a) redeem his or her shares in the
Fund or (b) remain invested in the Fund or exchange into any of the funds of the
Smith Barney Mutual Funds ordinarily available, which position the shareholder
would be expected to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern of
exchanges.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before
36
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended (the "1940 Act") in
extraordinary circumstances. The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995, payment will be made on
the third business day after receipt of proper tender. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certified
or official bank check, will be remitted upon clearance of the check, which may
take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares
37
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
other than those held by Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney Special Equities Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power must be
guaranteed by an eligible guarantor institution such as a domestic bank, savings
and loan institution, domestic credit union, member bank of the Federal Reserve
System or member firm of a national securities exchange. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month
38
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
of the shareholder's shares subject to the CDSC.) For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
- --------------------------------------------------------------------
PERFORMANCE
TOTAL RETURN
From time to time, the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
and Class Y shares of the Fund. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Total return is computed
for a specified period of time assuming deduction of the maximum sales charge,
if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most
39
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period for
which current dividend return is presented. The current dividend return for each
Class may vary from time to time depending on market conditions, the composition
of its investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. The Fund may also include
comparative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services, Inc.
or similar independent services that monitor the performance of mutual funds or
other industry publications. The Fund will include performance data for Class A,
Class B, Class C and Class Y shares in any advertisement or information
including performance data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services to the
Fund and the Company, including agreements with its distributor, investment
adviser, administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the investment advisory
agreement effective November 7, 1994, from its affiliate Mutual Management Corp.
(Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Holdings.) Investment advisory services continue to be provided to the Fund by
the same portfolio managers who had provided services under the agreement with
Mutual Management Corp.
40
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
SBMFM (through predecessor entities) has been in the investment counseling
business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to investment companies that had aggregate assets under
management as of January 31, 1995, in excess of $51.9 billion.
Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
PORTFOLIO MANAGEMENT
George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1994 is included in
the Fund's Annual Report dated December 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory, administrative and/or sub-administrative
services to investment companies that had aggregate assets under management as
of January 31, 1995, in excess of $69.7 billion.
41
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 5, 1994, 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. Prior
to May 5, 1994, Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class B and Class C shares at the
annual rate of 0.75% of the average daily net assets attributable to those
Classes. Class B shares that automatically convert to Class A shares eight years
after the date of original purchase will no longer be subject to distribution
fees. The fees are used by Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class B and Class C shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a
42
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
shareholder remains a holder of that Class. The service fee is credited at the
annual rate of up to 0.25% of the value of the average daily net assets of the
Class that remain invested in the Fund. Smith Barney Financial Consultants may
receive different levels of compensation for selling different Classes of
shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Company's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, C
and Y, with a par value of $.001 per share. Each Class of shares has the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and serves
as custodian of the Company's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Company's transfer agent.
43
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's
outstanding shares and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate fractional vote for any fractional share held of that Class.
Generally, shares of the Company will be voted on a Company-wide basis on all
matters except matters affecting only the interests of one Fund or one Class of
shares.
The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having
multiple accounts (I.E., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or TSSG.
-------------------
44
<PAGE>
[LOGO]
SMITH BARNEY
SPECIAL
EQUITIES
FUND
388 Greenwich Street
New York, New York 10013
Fund 102, 192, 253, 153
FD 0232 C5
[LOGO]
SMITH BARNEY
INVESTMENT GRADE BOND FUND
PROSPECTUS March 1, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Investment Grade Bond Fund (the "Fund") has an investment ob-
jective of high current income consistent with prudent investment manage-
ment and preservation of capital by investing in bonds and other income-
producing securities.
The Fund is one of a number of funds, each having distinct investment ob-
jectives and policies, making up Smith Barney Investment Funds Inc. (the
"Company"). The Company is an open-end management investment company com-
monly referred to as a mutual fund.
This Prospectus briefly sets forth certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an in-
vestment decision. Investors are encouraged to read this Prospectus care-
fully and to retain it for future reference. Shares of other funds offered
by the Company are described in separate Prospectuses that may be obtained
by calling the Company at the telephone number set forth above or by con-
tacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated March 1, 1995, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Company at the telephone number or ad-
dress set forth above or by contacting a Smith Barney Financial Consult-
ant. The Statement of Additional Information has been filed with the Secu-
rities and Exchange Commission (the "SEC") and is incorporated by refer-
ence into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary 3
Financial Highlights 10
Investment Objective and Management Policies 15
Valuation of Shares 19
Dividends, Distributions and Taxes 20
Purchase of Shares 22
Exchange Privilege 33
Redemption of Shares 36
Minimum Account Size 38
Performance 38
Management of the Company and the Fund 40
Distributor 41
Additional Information 42
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those con-
tained in this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Fund or the distributor. This Prospectus does not constitute an offer by
the Fund or the distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in any such juris-
diction.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus. See the "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management in-
vestment company that seeks to provide as high a level of current income
as is consistent with prudent investment management and preservation of
capital. Under normal circumstances, the Fund will invest at least 65% of
its assets in bonds. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of
shares ("Classes") to investors designed to provide them with the flexi-
bility of selecting an investment best suited to their needs. The general
public is offered three Classes of shares: Class A shares, Class B shares
and Class C shares, which differ principally in terms of sales charges and
rate of expenses to which they are subject. A fourth Class of shares,
Class Y shares, is offered only to investors meeting an initial investment
minimum of $5,000,000. See "Purchase of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value plus an ini-
tial sales charge of up to 4.50% and are subject to an annual service fee
of 0.25% of the average daily net assets of the Class. The initial sales
charge may be reduced or waived for certain purchases. Purchases of Class
A shares, which when combined with current holdings of Class A shares of-
fered with a sales charge equal or exceed $500,000 in the aggregate, will
be made at net asset value with no sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12 months of purchase. See "Prospectus Summary -- Reduced or No
Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to
a maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the
first year after purchase and by 1.00% each year thereafter to zero. This
CDSC may be waived for certain redemptions. Class B shares are subject to
an annual service fee of 0.25% and an annual distribution fee of 0.50% of
the average daily net assets of this Class. The Class B shares' distribu-
tion fee may cause that Class to have higher expenses and pay lower divi-
dends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automati-
cally to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares
will no longer be subject to an annual distribution fee. In addition, a
certain portion of Class B shares that have been acquired through the re-
investment of dividends and distributions ("Class B Dividend Shares") will
be converted at that time. See "Purchase of Shares -- Deferred Sales
Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no ini-
tial sales charge. They are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.45% of the average daily net assets of the
Class, and investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of purchase. This CDSC may be waived for certain redemp-
tions. The Class C shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Class C shares, which when combined with current holdings of Class C
shares of the Fund equal or exceed $500,000 in the aggregate, should be
made in Class A shares at net asset value with no sales charge, and will
be subject to a CDSC of 1.00% on redemptions made within 12 months of pur-
chase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to
any service or distribution fees.
In deciding which class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the
shares are subject to lower ongoing expenses over the term of the invest-
ment. As an investment alternative, Class B and Class C shares are sold
without any initial sales charge so the entire purchase price is immedi-
ately invested in the Fund. Any investment return on these additional in-
vested amounts may partially or wholly offset the higher annual expenses
of these Classes. Because the Fund's future return cannot be predicted,
however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment
time frame. For example, while Class C shares have a shorter CDSC period
than Class B shares, they do not have a conversion feature, and therefore,
are subject to an ongoing distribution fee. Thus, Class B shares may be
more attractive than Class C shares to investors with longer term invest-
ment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to any initial sales charge, CDSC or service or dis-
tribution fee. The maximum purchase amount for Class A shares is
$4,999,999, Class B shares is $249,999 and Class C shares is $499,999.
There is no maximum purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire pur-
chase price will be immediately invested in the Fund. In addition, Class A
share purchases, which when combined with current holdings of Class A
shares offered with a sales charge equal or exceed $500,000 in the aggre-
gate, will be made at net asset value with no initial sales charge, but
will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 aggregate investment may be met by adding the pur-
chase to the net asset value of all Class A shares held in funds sponsored
by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced
sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose
of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Company and the Fund" for
a complete description of the sales charges and service and distribution
fees for each Class of shares and "Valuation of Shares," "Dividends, Dis-
tributions and Taxes" and "Exchange Privilege" for other differences
between the Classes of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in
the Smith Barney 401(k) Program, which is generally designed to assist
plan sponsors in the creation and operations of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), as well as other types of participant directed, tax-qualified em-
ployee benefit plans (collectively, "Participating Plans"). Class A, Class
B, Class C and Class Y shares are available as investment alternatives for
Participating Plans. See "Purchase of Shares -- Smith Barney 401(k) Pro-
gram."
PURCHASE OF SHARES Shares may be purchased through the Fund's distribu-
tor, Smith Barney, a broker that clears securities transactions through
Smith Barney on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in the selling group. Direct purchases by certain re-
tirement plans may be made through the Fund's transfer agent, The Share-
holder Services Group, Inc. ("TSSG"), a subsidiary of First Data Corpora-
tion. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for
each account, or $250 for an individual retirement account ("IRA") or a
Self- Employed Retirement Plan. Investors in Class Y shares may open an
account for an initial investment of $5,000,000. Subsequent investments of
at least $50 may be made for all Classes. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the
minimum initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes is $25.
The minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes through
the Systematic Investment Plan described below is $50. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic In-
vestment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount of at
least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advi-
sory and management services to investment companies affiliated with Smith
Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Invest-
ment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company
Advisors, Inc. ("Boston Advisors") serves as the Fund's sub-administrator.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC") which in turn is an indirect wholly owned subsidiary of Mellon
Bank Corporation ("Mellon"). See "Management of the Company and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined, plus any applicable sales
charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is
also available from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are de-
clared daily and paid on the last business day of the Smith Barney state-
ment month. Distributions of net realized long- and short-term capital
gains, if any, are declared and paid annually after the end of the fiscal
year in which they are earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically in additional shares of the same
Class at current net asset value unless otherwise specified by an inves-
tor. Shares acquired by dividend and distribution reinvestments will not
be subject to any sales charge or CDSC. Class B shares acquired through
dividend and distribution reinvestments will become eligible for conver-
sion to Class A shares on a pro rata basis. See "Dividends, Distributions
and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-
term investors and not for investors who intend to liquidate their invest-
ment after a short period. Neither the Company as a whole nor any particu-
lar fund in the Company, including the Fund, constitutes a balanced in-
vestment plan. There can be no assurance that the Fund will achieve its
investment objective. The Fund may employ investment techniques which
involve certain risks, including entering into repurchase agreements and
reverse repurchase agreements, lending portfolio securities, selling secu-
rities short and investing in foreign securities through the use of Ameri-
can Depositary Receipts. See "Investment Objective and Management Policies
- -- Additional Investments."
THE FUND'S EXPENSES The following expense table lists the costs and ex-
penses that an investor will incur either directly or indirectly as a
shareholder of the Fund, based upon the maximum sales charge and maximum
CDSC that may be incurred at the time of purchase or redemption and,
unless otherwise noted, the Fund's operating expenses for its most recent
fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% NONE NONE NONE
Maximum CDSC (as a percentage of original cost
or redemption proceeds, whichever is lower) NONE* 4.50% 1.00% NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.65% 0.65% 0.65% 0.65%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses*** 0.21 0.17 0.22 0.21
TOTAL FUND OPERATING EXPENSES 1.11% 1.57% 1.57% 0.86%
<FN>
*Purchase of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge, equal or exceed $500,000
in the aggregate, will be made at net asset value with no sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12
months.
**Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class C shares do not have
a conversion feature and, therefore, are subject to an ongoing distri-
bution fee. As a result, long-term shareholders of Class C shares may
pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers,
Inc.
***For Class Y shares, "Other expenses" have been estimated based on ex-
penses incurred by Class A shares because Class Y shares had been sold
as of December 31, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors
may actually pay lower or no charges, depending on the amount purchased
and, in the case of Class B, Class C and certain Class A shares, the
length of time the shares are held and whether the shares are held through
the Smith Barney 401(k) Program. See "Purchase of Shares" and "Redemption
of Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of
the value of average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class C shares, Smith Barney
receives an annual 12b-1 fee of 0.70% of the value of average daily net
assets of the Class, consisting of a 0.45% distribution fee and a 0.25%
service fee. "Other expenses" in the above table include fees for share-
holder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
EXAMPLE The following example is intended to assist an investor in under-
standing the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating ex-
penses at the levels set forth in the table above. See "Purchase of
Shares," "Redemption of Shares" and "Management of the Company and the
Fund."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) Redemption at the end of each time period:
Class A $56 $79 $103 $174
Class B 61 80 96 174
Class C 26 50 86 187
Class Y 9 27 48 106
An investor would pay the following expenses on the
same investment, assuming the same annual return and
no redemption:
Class A $56 $79 $103 $174
Class B 16 50 86 174
Class C 16 50 86 187
Class Y 9 27 48 106
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense lev-
els of funds with different fee structures over varying investment peri-
ods. To facilitate such comparison, all funds are required to utilize a
5.00% annual return assumption. However, the Fund's actual return will
vary and may be greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
following information has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated December 31, 1994. The information set out below should be
read in conjunction with the financial statements and related notes that
also appear in the Fund's Annual Report, which is incorporated by refer-
ence into the Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/94# 12/31/93# 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 13.01 $ 11.89 $11.67
Income from investment operations:
Net investment income 0.74 0.88 0.14
Net realized and unrealized gain/(loss) on investments (1.88) 1.27 0.23
Total from investment operations (1.14) 2.15 0.37
Distributions to shareholders:
Distributions from net investment income (0.86) (0.88) (0.14)
Distributions in excess of net investment income -- (0.01) --
Distributions from net realized capital gains (0.31) (0.14) --
Distributions from capital (0.03) -- (0.01)
Total distributions (1.20) (1.03) (0.15)
Net Asset Value, end of year $ 10.67 $ 13.01 $11.89
Total return+ (8.95)% 18.45% 3.25%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $181,334 $10,137 $ 933
Ratio of operating expenses to average net assets 1.11% 1.11% 1.03%**++
Ratio of net investment income to average net assets 7.35% 6.67% 7.53%**
Portfolio turnover rate 18% 65% 47%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
++ The annualized operating expense ratio excludes interest expense. The
ratio including interest expense for the period ended December 31, 1992
was 1.04%.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since use of the undistributed method does not accord with re-
sults of operations.
</TABLE>
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/94# 12/31/93#
<S> <C> <C>
Net Asset Value, beginning of year $ 13.01 $ 11.89
Income from investment operations:
Net investment income 0.82 0.80
Net realized and unrealized gain/(loss) on investments (2.02) 1.29
Total from investment operations (1.20) 2.09
Distributions to shareholders:
Distributions from net investment income (0.80) (0.82)
Distributions in excess of net investment income -- (0.01)
Distributions from net realized capital gains (0.31) (0.14)
Distributions from capital 0.03 --
Total distributions (1.14) (0.97)
Net Asset Value, end of year $ 10.67 $ 13.01
Total return+ (9.41)% 18.06%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $221,120 $476,008
Ratio of operating expenses to average net assets 1.57% 1.58%
Ratio of net investment income to average net assets 6.89% 6.20%
Portfolio turnover rate 18% 65%
<FN>
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the pe-
riod since use of the undistributed method does not accord with results
of operations.
</TABLE>
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/92* 12/31/91
<S> <C> <C>
Net Asset Value, beginning of year $ 11.80 $ 10.43
Income from investment operations:
Net investment income 0.83 0.86
Net realized and unrealized gain/(loss) on investments 0.12 1.38
Total from investment operations 0.95 2.24
Distributions to shareholders:
Distributions from net investment income (0.83) (0.87)
Distributions in excess of net investment income -- --
Distributions from net realized capital gains -- --
Distributions from capital (0.03) --
Total distributions (0.86) (0.87)
Net Asset Value, end of year $ 11.89 $ 11.80
Total return+ 8.36% 22.50%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $431,783 $413,878
Ratio of operating expenses to average net assets 1.57%** 1.53%
Ratio of net investment income to average net assets 6.99% 7.90%
Portfolio turnover rate 47% 82%
<FN>
* On November 6, 1992 the Fund commenced selling Class A shares. Those
shares in existence prior to November 6, 1992 were designated Class B
shares.
** The operating expense ratio excludes interest expense. The ratio in-
cluding interest expense for the year ended December 31, 1992 was
1.58%.
*** Annualized expense ratio before waiver of fees by the distributor for
the years ended December 31, 1989 and 1988 were 1.66% and 1.57%, re-
spectively.
+ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charge.
++ Net investment income before waiver of fees by the distributor would
have been $0.86 and $0.87 for the years ended December 31, 1989 and
1988, respectively.
# Per share amounts have been calculated using the monthly average
shares method, which more appropriately presents the per share data
for the period since use of the undistributed method does not accord
with results of operations.
(1) Not covered by Coopers & Lybrand's report.
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88(1) 12/31/87(1) 12/31/86(1) 12/31/85(1)
<S> <C> <C> <C> <C> <C>
$ 11.01 $ 10.33 $ 10.55 $ 12.91 $ 12.00 $ 10.88
0.86 0.87++ 0.90++ 0.89 1.10 1.08
(0.57) 0.68 (0.24) (1.24) 1.16 1.54
0.29 1.55 0.66 (0.35) 2.26 2.62
(0.87) (0.87) (0.88) (1.12) (1.10) (1.39)
-- -- -- -- -- --
-- -- -- (0.89) (0.25) (0.11)
-- -- -- -- -- --
(0.87) (0.87) (0.88) (2.01) (1.35) (1.50)
$ 10.43 $ 11.01 $ 10.33 $ 10.55 $ 12.91 $ 12.00
2.98% 15.57% 6.43% (2.83)% 19.54% 26.43%
$405,779 $483,382 $532,794 $705,561 $421,011 $233,880
1.58% 1.63%*** 1.22%*** 1.62% 1.62% 1.79%
8.20% 8.07% 8.74% 7.96% 7.74% 9.78%
59% 118% 72% 79% 211% 717%
</TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94# 12/31/93*#
<S> <C> <C>
Net Asset Value, beginning of period $ 13.01 $12.56
Income from investment operations:
Net investment income 0.75 0.63
Net realized and unrealized gain/(loss) on investments (1.95) 0.65
Total from investment operations (1.20) 1.28
Distributions to shareholders:
Distributions from net investment income (0.80) (0.68)
Distributions in excess of net investment income -- (0.01)
Distributions from net realized capital gains (0.31) (0.14)
Distributions from capital (0.03) --
Total distributions (1.14) (0.83)
Net Asset Value, end of period $ 10.67 $13.01
Total return+ (9.41)% 10.38%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 999 $ 208
Ratio of operating expenses to average net assets 1.57% 1.61%**
Ratio of net investment income to average net assets 6.89% 6.17%**
Portfolio turnover rate 18% 65%
<FN>
* The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 26, 1993.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more approximately presents the per share data for the
period since use of the undistributed method does not accord with re-
sults of operations.
</TABLE>
As of December 31, 1994, no Class Y shares have been sold and, accord-
ingly, no comparable financial information is available at this time for
that Class.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set forth below is a description of the investment objective and policies
of the Fund. There can be no assurance that the Fund will achieve its in-
vestment objective. Certain instruments and techniques discussed in this
summary are described in greater detail in this Prospectus under "Addi-
tional Investments" and in the Statement of Additional Information. A de-
scription of the rating systems of Moody's Investors Services Inc.
("Moody's") and Standard & Poors Corporation ("S&P") is contained in the
Appendix to the Statement of Additional Information.
The Statement of Additional Information contains specific investment re-
strictions which govern the Fund's investments. These restrictions and the
Fund's investment objective are fundamental policies, which means that
they may not be changed without a majority vote of shareholders of the
Fund. Except for the objective and those restrictions specifically identi-
fied as fundamental, all investment policies and practices described in
this Prospectus and in the Statement of Additional Information are non-
fundamental, so that the Board of Directors may change them without share-
holder approval. The fundamental restrictions applicable to the Fund in-
clude a prohibition on (a) purchasing a security if, as a result, more
than 5% of the assets of the Fund would be invested in the securities of
the issuer (with certain exceptions) or the Fund would own more than 10%
of the outstanding voting securities of the issuer, (b) investing more
than 10% of the Fund's total assets in "illiquid" securities (which in-
cludes repurchase agreements with more than seven days to maturity), and
(c) investing more than 25% of the Fund's total assets in the securities
of issuers in a particular industry (with exceptions for securities guar-
anteed by the United States government, its agencies or instrumentalities
("U.S. government securities") and certain money market instruments).
The Fund's investment objective is to provide as high a level of current
income as is consistent with prudent investment management and preserva-
tion of capital. The Fund seeks to achieve its objective by investing in
any of the following securities; corporate bonds rated Baa or better by
Moody's or BBB or better by S&P; U.S. government securities; commercial
paper issued by domestic corporations and rated 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 an outstanding debt issue rated Aa or better by Moody's or AA or
better by S&P; negotiable bank certificates of deposit and bankers' accep-
tances issued by domestic banks (but not their foreign branches) having
total assets in excess of $1 billion; and high-yielding common stocks and
warrants. Obligations rated in the lowest of the top four rating catego-
ries (Baa by Moody's or BBB by S&P) may have speculative characteristics
and changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity to make principal and interest payments,
including a greater possibility of default or bankruptcy of the issuer,
than is the case with higher grade bonds. 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 the purchase by the Fund. In ad-
dition, 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 securities by the Fund, although SBMFM
will consider these events in determining 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 reorganization of Moody's and/or S&P, the Fund will
attempt to use comparable ratings as standards for its investments in ac-
cordance with the investment objectives and policies of the Fund.
The Fund may enter into repurchase agreements, reverse repurchase agree-
ments, firm commitment agreements, "short sales against the box" and may
lend its portfolio securities. Except when in a temporary defensive in-
vestment position, the Fund intends to maintain at least 65% of its assets
invested in bonds.
The value of securities in which the Fund invests (and therefore, the
Fund's net asset value per share) generally will vary inversely with
changes in interest rates and also will fluctuate according to changes in
market conditions and other factors.
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations
of, or are guaranteed by, the United States government, its agencies or
instrumentalities. These include bills, certificates of indebtedness, and
notes and bonds issued by the United States Treasury or by agencies or in-
strumentalities of the United States government. Some U.S. government se-
curities, such as U.S. Treasury bills and bonds, are supported by the full
faith and credit of the United States Treasury; others are supported by
the right of the issuer to borrow from the United States Treasury; others,
such as those of the Federal National Mortgage Association, are supported
by the discretionary authority of the United States government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association and the Federal Home Loan Mortgage Corporation
("FHLMC") are supported only by the credit of the instrumentality. Mort-
gage participation certificates issued by the FHLMC generally represent
ownership interests in a pool of fixed-rate conventional mortgages. Timely
payment of principal and interest on these certificates is guaranteed
solely by the issuer of the certificates. Other investments will include
Government National Mortgage Association Certificates ("GNMA Certifi-
cates"), which are mortgage- backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and prin-
cipal is guaranteed by the full faith and credit of the United States gov-
ernment. While the United States government guarantees the payment of
principal and interest on GNMA Certificates, the market value of the secu-
rities is not guaranteed and will fluctuate.
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the issu-
ers of instruments acceptable for purchase by the Fund and with certain
dealers on the Federal Reserve Bank of New York's list of reporting deal-
ers. Under the terms of a typical repurchase agreement, the Fund would ac-
quire an underlying debt obligation for a relatively short period (usually
not more than one week) subject to an obligation of the seller to repur-
chase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to mar-
ket fluctuations during the Fund's holding period. The value of the under-
lying securities will be at least equal at all times to the total amount
of the repurchase obligation, including interest. The Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults
on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the collateral securities, including the risk of
a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights to them, the risk of in-
curring expenses associated with asserting those rights and the risk of
losing all or part of the income from the agreement. SBMFM or Boston Advi-
sors, acting under the supervision of the Board of Directors, review on an
ongoing basis the creditworthiness and the value of the collateral of
those banks and dealers with which the Fund enters into repurchase agree-
ments to evaluate potential risks.
Reverse Repurchase Agreements. A reverse repurchase agreement involves
the sale of a money market instrument by the Fund and its agreement to re-
purchase the instrument at a specified time and price. The Fund will main-
tain a segregated account consisting of U.S. government securities or cash
or cash equivalents to cover its obligations under reverse repurchase
agreements with broker-dealers (but not banks). The Fund will invest the
proceeds in other money market instruments or repurchase agreements matur-
ing not later than the expiration of the reverse repurchase agreement.
Under the Investment Company Act of 1940, as amended (the "1940 Act"), re-
verse repurchase agreements may be considered borrowings by the seller;
accordingly, the Fund will limit its investments in reverse repurchase
agreements and other borrowings to no more than 33 1/3 % of its total as-
sets.
Firm Commitment Agreements and When-Issued Purchases. Firm commitment
agreements and when-issued purchases call for the purchase of securities
at an agreed-upon price on a specified future date, and would be used, for
example, when a decline in the yield of securities of a given issuer is
anticipated. The Fund as purchaser assumes the risk of any decline in
value of the security beginning on the date of the agreement or purchase.
The Fund will not use such transactions for leveraging purposes, and ac-
cordingly will segregate U.S. government securities, cash or cash equiva-
lents in an amount sufficient to meet its purchase obligations under the
agreement.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of
U.S. government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market
value of the securities loaned; (b) the Fund may at any time call the loan
and obtain the return of the securities loaned; (c) the Fund will receive
any interest or dividends paid on the loaned securities; and (d) the ag-
gregate market value of securities loaned will not at any time exceed 33
1/3 % of the total assets of the Fund. The risks in lending portfolio se-
curities, as with other extensions of secured credit, consists of possible
delays in receiving additional collateral or in the recovery of the secu-
rities or possible loss of rights in the collateral should the borrower
fail financially. Loans will be made to firms deemed by SBMFM to be in
good standing and will not be made unless, in the judgement of SBMFM, the
consideration to be earned from such loans would justify the risk.
Short Sales. The Fund may sell securities short "against the box." While
a short sale is the sale of a security the Fund does not own, it is
"against the box" if at all times when the short position is open, the
Fund owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the
same issue as the securities sold short. Short sales "against the box" are
used to defer recognition of capital gains or losses.
American Depositary Receipts. 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 publicly traded on exchanges or over-the-
counter in the United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and se-
lects broker-dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable
commission rates. SBMFM may select broker-dealers which provide it with
research services and may cause the Fund to pay such broker-dealers com-
missions which exceed those other broker-dealers may have charged, if it
views the commissions as reasonable in relation to the value of the bro-
kerage and/or research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for
the fiscal year by the monthly average of the value of the Fund's securi-
ties, with money market instruments with less than one year to maturity
excluded. A 100% portfolio turnover rate would occur, for example, if all
included securities were replaced once during the year. The Fund's portfo-
lio turnover rates for each of the past fiscal years are set forth under
"Financial Highlights."
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of reg-
ular trading on the NYSE on each day that the NYSE is open, by dividing
the value of the Fund's net assets attributable to each Class by total
number of shares of the Class outstanding.
A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board
of Directors as the primary market. Fund securities which are primarily
traded on foreign exchanges may be valued with the assistance of a pricing
service and are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a foreign security is valued is likely to have
changed such value, then the fair value of those securities will be deter-
mined by consideration of other factors by or under the direction of the
Board of Directors. Unlisted foreign securities are valued at the mean be-
tween the last available bid and offer price prior to the time of valua-
tion. U.S. over-the- counter securities will be valued on the basis of the
bid price at the close of business on each day. Securities and assets for
which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of Di-
rectors. Notwithstanding the above, bonds and other fixed income securi-
ties are valued by using market quotations and may be valued on the basis
of prices provided by a pricing service approved by the Board of Direc-
tors. Any assets or liabilities initially expressed in terms of foreign
currencies will be converted into U.S. dollar values at the mean between
the bid and offered quotations of such currencies against U.S. dollars as
last quoted by any recognized dealer.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in de-
termining the amount of dividends from net investment income and distribu-
tions of capital gains payable to shareholders.
The Fund declares dividends daily consisting of estimated daily net in-
vestment income, and pays dividends monthly. Any net realized long-term
capital gains, after utilization of capital loss carryforwards, will be
distributed at least annually. Net realized short-term capital gains may
be paid with the distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends and capital gains
will be reinvested automatically in additional shares of the same Class at
net asset value subject to no sales charge or CDSC. In order to avoid the
application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undis-
tributed ordinary income or capital gains and expects to pay any other
dividends and distributions necessary to avoid the application of this
tax.
If, for any full fiscal year, the Fund's total distributions exceed cur-
rent and accumulated earnings and profits, the excess distributions may be
treated as a taxable dividend or as a tax-free return of capital (up to
the amount of the shareholder's tax basis in his or her shares). The
amount treated as a tax-free return of capital will reduce a shareholder's
adjusted basis in his or her shares. Pursuant to the requirements of the
1940 Act and other applicable laws, a notice will accompany any distribu-
tion paid from sources other then net investment income. In the event the
Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreas-
ing the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends and distributions on Class B and Class C shares
may be lower than the per share dividends on Class A and Class Y shares
principally as a result of the distribution fee applicable with respect to
Class B and Class C shares. The per share dividends on Class A shares of
the Fund may be lower than the per share dividends on Class Y shares prin-
cipally as a result of the service fee applicable to Class A shares. Dis-
tributions of capital gains, if any, will be in the same amount for Class
A, Class B, Class C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains
earned will be determined on a fund-by-fund basis, rather than on a
Company-wide basis. The Fund has qualified and intends to continue to
qualify as a "regulated investment company" under the Code. In any taxable
year in which the Fund so qualifies and distributes at least 90% of its
investment company taxable income (which includes, among other items, div-
idends, interest and the excess of any net short-term capital gains over
net long-term capital losses), the Fund (but not its shareholders) gener-
ally will be relieved of Federal income tax on the investment company tax-
able income and net realized capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, distributed to
shareholders. In order to qualify as a regulated investment company, the
Fund will be required to meet various Code requirements.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital gains dividends are taxable to share-
holders as long-term capital gains regardless of the length of time a
shareholder may have held shares of the Fund.
Dividends (including capital gains dividends) declared by the Fund in
October, November or December of any calendar year to shareholders of
record on a date in such a month will be deemed to have been received by
shareholders on December 31 of that calendar year, provided that the divi-
dend is actually paid by the Fund during January of the following calendar
year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss.
Such gain or loss generally will be a capital gain or loss if the shares
are capital assets in the shareholder's hands, and generally will be long-
term or short- term depending upon the shareholder's holding period for
the shares. Any loss realized by a shareholder on disposition of Fund
shares held by the shareholder for six months or less will be treated as
long-term capital loss to the extent of any distributions of capital gains
dividends received by the shareholder with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have
been designated as capital gains dividends. Dividends and distributions,
and gains realized upon a disposition of Fund shares, may also be subject
to state, local or foreign taxes depending on each shareholder's particu-
lar situation. Dividends, if any, consisting of interest from U.S. govern-
ment securities may be exempt from all state and local income taxes. In-
vestors should consult their tax advisors for specific information on the
tax consequences of particular types of distributions.
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to inves-
tors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon
certain redemptions. Class Y shares are sold without an initial sales
charge or a CDSC and are available only to investors investing a minimum
of $5,000,000. See "Prospectus Summary -- Alternative Purchase Arrange-
ments" for a discussion of factors to consider in selecting which Class of
shares to purchase.
Purchases of Fund shares must be made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group, except for investors purchasing shares of the Fund
through a qualified retirement plan who may do so directly through TSSG.
When purchasing shares of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class C or Class Y shares. No mainte-
nance fee will be charged by the Fund in connection with a brokerage ac-
count through which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250
for an IRA or a Self-Employed Retirement Plan in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent in-
vestment requirement for all Classes in the Fund is $25. For the Fund's
Systematic Investment Plan, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment require-
ment for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Travelers and its subsidiaries, in-
cluding Smith Barney, Directors of the Company and their spouses and chil-
dren. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's ac-
count by the Company's transfer agent, TSSG. Share certificates are issued
only upon a shareholder's written request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day, pro-
vided the order is received by Smith Barney prior to Smith Barney's close
of business (the "trade date"). Currently, payment for Fund shares is due
on the fifth business day after the trade date (the "settlement date").
The Fund anticipates that, in accordance with regulatory changes, begin-
ning on or about June 1, 1995, the settlement date will be the third busi-
ness day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchas-
ing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or TSSG is authorized
through preauthorized transfers of $50 or more to charge the regular bank
account or other financial institution indicated by the shareholder on a
monthly or quarterly basis to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or
TSSG. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make addi-
tions to the account. Additional information is available from the Fund or
a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.05%
$25,000 - $49,999 4.00% 4.17% 3.60%
$50,000 - $99,999 3.50% 3.63% 3.15%
$100,000 - $249,999 2.50% 2.56% 2.25%
$250,000 - $499,999 1.50% 1.52% 1.35%
$500,000 and over * * *
<FN>
* Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge, equal or exceed $500,000
in the aggregate, will be made at net asset value without any initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and
other dealers whose clients make purchases of $500,000 or more. The CDSC
is waived in the same circumstances in which the CDSC applicable to
Class B and Class C shares is waived. See "Deferred Sales Charge Alter-
natives" and "Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of the Fund as defined in
the Securities Act of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which in-
cludes an individual, his or her spouse and children, or a trustee or
other fiduciary of a single trust estate or single fiduciary account. The
reduced sales charge minimums may also be met by aggregating the purchase
with the net asset value of all Class A shares held in funds sponsored by
Smith Barney that are offered with a sales charge listed under "Exchange
Privileges."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to Di-
rectors of the Company and employees of Travelers and its subsidiaries, or
the spouses and children of such persons (including the surviving spouse
of a deceased Director or employee, and retired Directors or employees),
or sales to any trust, pension, profit-sharing or other benefit plan for
such persons provided such sales are made upon the assurance of the pur-
chaser that the purchase is made for investment purposes and that the se-
curities will not be re-sold except through redemption or repurchase; (b)
offers of Class A shares to any other investment company in connection
with the combination of such company with the Fund by merger, acquisition
of assets or otherwise; (c) purchases of Class A shares by any client of a
newly employed Smith Barney Financial Consultant (for a period up to 90
days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made
with the proceeds of the redemption of shares of a mutual fund which (i)
was sponsored by the Financial Consultant's prior employer, (ii) was sold
to the client by the Financial Consultant and (iii) was subject to a sales
charge; (d) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are
offered with a sales charge equal to or greater than the maximum sales
charge of the Fund) and who wish to reinvest their redemption proceeds in
the Fund, provided the reinvestment is made within 60 calendar days of the
redemption; and (e) accounts managed by registered investment advisory
subsidiaries of Travelers. In order to obtain such discounts, the pur-
chaser must provide sufficient information at the time of purchase to per-
mit verification that the purchase would qualify for the elimination of
the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by ag-
gregating the dollar amount of the new purchase and the total net asset
value of all Class A shares of the Fund and of funds sponsored by Smith
Barney, which are offered with a sales charge listed under "Exchange Priv-
ilege" then held by such person and applying the sales charge applicable
to such aggregate. In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase to permit verifica-
tion that the purchase qualifies for the reduced sales charge. The right
of accumulation is subject to modification or discontinuance at any time
with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and part-
ners) of the same employer purchasing as a group, provided each partici-
pant makes the minimum initial investment required. The sales charge ap-
plicable to purchases by each member of such a group will be determined by
the table set forth above under "Initial Sales Charge Alternative -- Class
A Shares," and will be based upon the aggregate sales of Class A shares of
the Smith Barney Mutual Funds offered with a sales charge to, and share
holdings of, all members of the group. To be eligible for such reduced
sales charges or to purchase at net asset value, all purchases must be
pursuant to an employer- or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to speci-
fied partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions,
IRAs or investments pursuant to retirement plans under Sections 401 or 408
of the Code. Smith Barney may also offer a reduced sales charge or net
asset value purchase for aggregating related fiduciary accounts under such
conditions that Smith Barney will realize economies of sales efforts and
sales related expenses. An individual who is a member of a qualified group
may also purchase Class A shares at the reduced sales charge applicable to
the group as a whole. The sales charge is based upon the aggregate dollar
value of Class A shares offered with a sales charge that have been previ-
ously purchased and are still owned by the group, plus the amount of the
current purchase. A "qualified group" is one which (a) has been in exist-
ence for more than six months, (b) has a purpose other than acquiring Fund
shares at a discount and (c) satisfies uniform criteria which enable Smith
Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to ar-
range for group meetings between representatives of the Fund and the mem-
bers, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Bar-
ney. In order to obtain such reduced sales charge or to purchase at net
asset value, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase qualifies for the re-
duced sales charge. Approval of group purchase reduced sales charge plans
is subject to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by aggregating invest-
ments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of
the Smith Barney Mutual Funds offered with a sales charge over the 13
month period based on the total amount of intended purchases plus the
value of all Class A shares previously purchased and still owned. An al-
ternative is to compute the 13 month period starting up to 90 days before
the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the pe-
riod, the investor must pay the difference between the sale charges appli-
cable to the purchases made and the charges previously paid, or an appro-
priate number of escrowed shares will be redeemed. Please contact a Smith
Barney Financial Consultant or TSSG to obtain a Letter of Intent
application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase pay-
ment may be immediately invested in the Fund. A CDSC, however, may be im-
posed on certain redemptions of these shares. "CDSC Shares" are: (a) Class
B shares; (b) Class C shares; and (c) Class A shares, which when combined
with Class A shares offered with a sales charge currently held by an in-
vestor, equal or exceed $500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appre-
ciation of Fund assets; (b) reinvestment of dividends or capital gains
distributions; (c) with respect to Class B shares, shares redeemed more
than five years after their purchase; or (d) with respect to Class C
shares and Class A shares that are CDSC Shares, shares redeemed more than
12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in
which the CDSC is imposed on Class B shares, the amount of the charge will
depend on the number of years since the shareholder made the purchase pay-
ment from which the amount is being redeemed. Solely for purposes of de-
termining the number of years since a purchase payment, all purchase pay-
ments made during a month will be aggregated and deemed to have been made
on the last day of the preceding Smith Barney statement month. The follow-
ing table sets forth the rates of the charge for redemptions of Class B
shares by shareholders, except in the case of purchases by Participating
Plans, as described below. See "Purchase of Shares -- Smith Barney 401(k)
Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer
be subject to any distribution fees. There also will be converted at that
time such proportion of Class B Dividend Shares owned by the shareholder
as the total number of his or her Class B shares converting at the time
bears to the total number of Class B shares (other than Class B Dividend
Shares) owned by the shareholder. Shareholders who held Class B shares of
Smith Barney Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on July 15, 1994 and who subsequently exchange those shares
for Class B shares of the Fund will be offered the opportunity to exchange
all such Class B shares for Class A shares of the Fund four years after
the date on which those shares were deemed to have been purchased. Holders
of such Class B shares will be notified of the pending exchange in writing
approximately 30 days before the fourth anniversary of the purchase date
and, unless the exchange has been rejected in writing, the exchange will
occur on or about the fourth anniversary date. See "Prospectus Summary --
Alternative Purchase Arrangements -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were ini-
tially acquired in one of the other applicable Smith Barney Mutual Funds,
and Fund shares being redeemed will be considered to represent, as appli-
cable, capital appreciation or dividend and capital gains distribution re-
investments in such other funds. For Federal income tax purposes, the
amount of the CDSC will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any CDSC will
be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth
month after the purchase, the investor decided to redeem $500 of his or
her investment. Assuming at the time of the redemption the net asset value
had appreciated to $12 per share, the value of the investor's shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the amount which represents appreciation ($200) and the value of the rein-
vested dividend shares ($60). Therefore, $240 of the $500 redemption pro-
ceeds ($500 minus $260) would be charged at a rate of 4.00% (the applica-
ble rate for Class B shares) for a total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month of the value of the shareholder's shares at the time the withdrawal
plan commences (see below) (provided, however, that automatic cash with-
drawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) re-
demption of shares made in connection with qualified distributions from
retirement plans or IRAs upon the attainment of age 59 1/2 ; (e) involun-
tary redemptions; and (f) redemptions of shares in connection with a com-
bination of the Fund with any investment company by merger, acquisition of
assets or otherwise. In addition, a shareholder who has redeemed shares
from other funds of the Smith Barney Mutual Funds may, under certain cir-
cumstances, reinvest all or part of the redemption proceeds within 60 days
and receive pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in
the case of all other shareholders) of the shareholder's status or hold-
ings, as the case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k)
Program, which is generally designed to assist plan sponsors in the cre-
ation and operation of retirement plans under Section 401(a) of the Code.
To the extent applicable, the same terms and conditions are offered to all
Participating Plans in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class
Y shares as investment alternatives under the Smith Barney 401(k) Program.
Class A, Class B and Class C shares acquired through the Smith Barney
401(k) Program are subject to the same service and/or distribution fees
as, but different sales charge and CDSC schedules than, the Class A, Class
B and Class C shares acquired by other investors. Similar to those avail-
able to other investors, Class Y shares acquired through the Smith Barney
401(k) Program are not subject to any initial sales charge, CDSC or ser-
vice or distribution fee. Once a Participating Plan has made an initial
investment in the Fund, all of its subsequent investments in the Fund must
be in the same Class of shares, except as otherwise described below.
CLASS A SHARES. Class A shares of the Fund are offered without any ini-
tial sales charge to any Participating Plan that purchases from $500,000
to $4,999,999 of Class A shares of one or more funds of the Smith Barney
Mutual Funds. Class A shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemp-
tion proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participat-
ing Plan that purchases less than $250,000 of one or more funds of the
Smith Barney Mutual Funds. Class B shares acquired through the Smith Bar-
ney 401(k) Program are subject to a CDSC of 3.00% of redemption proceeds,
if the Participating Plan terminates within eight years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to exchange all
of its Class B shares for Class A shares of the Fund. Such Plans will be
notified of the pending exchange in writing approximately 60 days before
the eighth anniversary of the enrollment date and, unless the exchange has
been rejected in writing, the exchange will occur on or about the eighth
anniversary date. Once the exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class B shares of the Fund but
instead may acquire Class A shares of the Fund. If the Participating Plan
elects not to exchange all of its Class B shares at that time each Class B
share held by the Participating Plan will have the same conversion feature
as Class B shares held by other investors. See "Purchase of Shares -- De-
ferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participat-
ing Plan that purchases from $250,000 to $499,999 of one or more funds of
the Smith Barney Mutual Funds. Class C shares acquired through the Smith
Barney 401(k) Program after November 7, 1994 will be subject to a CDSC of
1.00% of redemption proceeds, if the Participating Plan terminates within
four years of the date the Participating Plan first enrolled in the Smith
Barney 401(k) Program. In any year after the date a Participating Plan en-
rolled in the Smith Barney 401(k) Program if its total Class C holdings
equal at least $500,000 as of the calendar year-end, the Participating
Plan will be offered the opportunity to exchange all of its Class C shares
for Class A shares of the Fund. Such Plans will be notified in writing
within 30 days after the last business day of the calendar year, and un-
less the exchange offer has been rejected in writing, the exchange will
occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to ac-
quire Class C shares of the Fund but instead may acquire Class A shares of
the Fund. Class C shares not converted will continue to be subject to the
distribution fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any ser-
vice or distribution fees, sales charge or CDSC to any Participating Plan
that purchases $5,000,000 or more of Class Y shares of one or more funds
of the Smith Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the
net asset value of the shares redeemed does not exceed the current net
asset value of the shares purchased through reinvestment of dividends or
capital gains distributions, plus (a) with respect to Class A and Class C
shares, the current net asset value of such shares purchased more than one
year prior to redemption and, with respect to Class B shares, the current
net asset value of Class B shares purchased more than eight years prior to
the redemption, plus (b) with respect to Class A and Class C shares, in-
creases in the net asset value of the shareholder's Class A or Class C
shares above the purchase payments made during the preceding year and,
with respect to Class B shares, increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to a Participating
Plan depends on the number of years since the Participating Plan first be-
came enrolled in the Smith Barney 401(k) Program, unlike the applicability
of the CDSC to other shareholders, which depends on the number of years
since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result
of: (a) the retirement of an employee in the Participating Plan; (b) the
termination of employment of an employee in the Participating Plan; (c)
the death or disability of an employee in the Participating Plan; (d) the
attainment of age 59 1/2 by an employee in the Participating Plan; (e)
hardship of an employee in the Participating Plan to the extent permitted
under Section 401(k) of the Code; or (f) redemptions of shares in connec-
tion with a loan made by the Participating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the
Smith Barney 401(k) Program must purchase such shares directly from TSSG.
For further information regarding the Smith Barney 401(k) Program, inves-
tors should contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of
Class A, Class B and Class C shares are subject to minimum investment re-
quirements and all shares are subject to the other requirements of the
fund into which exchanges are made and a sales charge differential may
apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utilities Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Money Market Funds
** Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund
through the Smith Barney 401(k) Program may exchange those shares for
Class C shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
CLASS A EXCHANGES. Class A shares of the Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the
maximum charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund sold with a higher sales charge. The "sales
charge differential" is limited to a percentage rate no greater than the
excess of the sales charge rate applicable to purchases of shares of the
mutual fund being acquired in the exchange over the sales charge rate(s)
actually paid on the mutual fund shares relinquished in the exchange and
on any predecessor of those shares. For purposes of the exchange privi-
lege, shares obtained through automatic reinvestment of dividends and cap-
ital gains distributions, are treated as having paid the same sales
charges applicable to the shares on which the dividends or distributions
were paid; however, except in the case of the Smith Barney 401(k) Program,
if no sales charge was imposed upon the initial purchase of shares, any
shares obtained through automatic reinvestment will be subject to a sales
charge differential upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in
any of the funds imposing a higher CDSC than that imposed by the Fund, the
exchanged Class B shares will be subject to the higher applicable CDSC.
Upon an exchange, the new Class B shares will be deemed to have been pur-
chased on the same date as the Class B shares of the Fund that have been
exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be
deemed to have been purchased on the same date as the Class C shares of
the Fund that have been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the
funds identified above may do so without imposition of any charge.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the ex-
change privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM
may determine that a pattern of frequent exchanges is excessive and con-
trary to the best interests of the Fund's other shareholders. In this
event, SBMFM will notify Smith Barney and Smith Barney may, at its discre-
tion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, Smith Barney will provide notice in
writing or by telephone to the shareholder at least 15 days prior to sus-
pending the exchange privilege and during the 15 day period the share-
holder will be required to (a) redeem his or her shares in the Fund or (b)
remain invested in the Fund or exchange into any of the funds of the Smith
Barney Mutual Funds ordinarily available, which position the shareholder
would be expected to maintain for a significant period of time. All rele-
vant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential. Redemption procedures discussed
below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the ac-
count registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no signature
guarantee is required. A capital gain or loss for tax purposes will be re-
alized upon the exchange, depending upon the cost or other basis of shares
redeemed. Before exchanging shares, investors should read the current pro-
spectus describing the shares to be acquired. The Fund reserves the right
to modify or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at
no charge other than any applicable CDSC. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined.
If a shareholder holds shares in more than one Class, any request for re-
demption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class
than specified, the redemption request will be delayed until the Fund's
transfer agent receives further instructions from Smith Barney, or if the
shareholder's account is not with Smith Barney, from the shareholder di-
rectly. The redemption proceeds will be remitted on or before the seventh
day following receipt of proper tender, except on any days on which the
NYSE is closed or as permitted under the 1940 Act in extraordinary circum-
stances. The Fund anticipates that, in accordance with regulatory changes,
beginning on or about June 1, 1995, payment will be made on the third
business day after receipt of proper tender. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific in-
struction and Smith Barney will benefit from the use of temporarily unin-
vested funds. Redemption proceeds for shares purchased by check, other
than a certified or official bank check, will be remitted upon clearance
of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an inves-
tor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney Investment Grade Bond Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares
are registered. If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be accompanied by
an endorsed stock power) and must be submitted to TSSG together with the
redemption request. Any signature appearing on a redemption request, share
certificate or stock power must be guaranteed by an eligible guarantor in-
stitution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of
a national securities exchange. TSSG may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly
received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may
elect to receive cash payments of at least $50 monthly or quarterly. Re-
tirement plan accounts are eligible for automatic cash withdrawal plans
only where the shareholder is eligible to receive qualified distributions
and has an account value of at least $5,000. The withdrawal plan will be
carried over on exchanges between funds or Classes of the Fund. Any appli-
cable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to
the CDSC at the time the withdrawal plan commences. (With respect to with-
drawal 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
shareholder's shares subject to the CDSC.) For further information regard-
ing the automatic cash withdrawal plan, shareholders should contact a
Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in
the Fund account is less than $500. (If a shareholder has more than one
account in this Fund, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reduc-
tions in net asset value. Before the Fund exercises such right, sharehold-
ers will receive written notice and will be permitted 60 days to bring ac-
counts up to the minimum to avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30 day "yield" for each
Class of shares. The yield of a Class refers to the income generated by an
investment in such Class over the 30 day period identified in the adver-
tisement, and is computed by dividing the net investment income per share
earned by the Class during the period by the net asset value per share on
the last day of the period. This income is "annualized" by assuming that
the amount of income is generated each month over a one year period and is
compounded semi-annually. The annualized income is then shown as a per-
centage of the net asset value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class
A, Class B, Class C and Class Y shares of the Fund. These figures are
based on historical earnings and are not intended to indicate future per-
formance. Total return is computed for a specific period of time assuming
deduction of the maximum sales charge, if any, from the initial amount in-
vested and reinvestment of all income dividends and capital gains distri-
butions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the
period so calculated by the initial amount invested and subtracting 100%.
The standard average annual total return, as prescribed by the SEC, is de-
rived from this total return which provides the ending redeemable value.
Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the
same manner but without annualizing the total return or taking sales
charges into account. The Fund calculates current dividend return for each
Class by annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time
to time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible differences
in the methods used in calculating current dividend return should be con-
sidered when comparing a Class' current return to yields published for
other investment companies and other investment vehicles. The Fund may
also include comparative performance information in advertising or market-
ing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. or similar independent services that monitor the
performance of mutual funds or other industry publications. The Fund will
include performance data for Class A, Class B, Class C and Class Y shares
in any advertisement or information including performance data of the
Fund.
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all signifi-
cant agreements between the Company and the Fund and companies that fur-
nish services to the Fund, including agreements with its distributor, in-
vestment adviser, administrator, sub-administrator, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
investment adviser, administrator and sub-administrator. The Statement of
Additional Information contains general and background information regard-
ing each Director and executive officer of the Company.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Fund's investment adviser pursuant to a transfer of the investment
advisory agreement, effective November 7, 1994, from its affiliate Mutual
Management Corp. (Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Holdings.) Investment advisory services continue to be
provided to the Fund by the same portfolio managers who had provided ser-
vices under the agreement with Mutual Management Corp. SBMFM (through pre-
decessor entities) has been in the investment counseling business since
1934 and is a registered investment adviser. SBMFM renders investment ad-
vice to investment companies that had aggregate assets under management as
of January 31, 1995 in excess of $51.9 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs profes-
sional portfolio managers and securities analysts who provide research
services to the Fund. Under an investment advisory agreement, the Fund
pays SBMFM a monthly fee at the annual rate of 0.45% of the value of the
Fund's average daily net assets up to $500 million and 0.42% of the value
of average daily net assets thereafter. For the fiscal year ended December
31, 1994, SBMFM was paid investment advisory fees equal to 0.45% of the
value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
George E. Mueller, Jr., Managing Director of SBMFM, has served as the In-
vestment Officer of the Fund since January 1, 1985, and manages the day-
to-day operations of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance informa-
tion regarding the Fund during the fiscal year ended December 31, 1994 is
included in the Annual Report dated December 31, 1994. A copy of the An-
nual Report may be obtained upon request and without charge from a Smith
Barney Financial Consultant or by writing or calling the Fund at the ad-
dress or phone number listed on page one of this Prospectus.
ADMINISTRATOR -- SBMFM
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund
paid an administration fee at the annual rate of 0.20% of the value of the
Fund's average daily net assets.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides invest-
ment management, investment advisory, administrative and/or sub-
administrative services to investment companies which had aggregate assets
under management as of January 31, 1995, in excess of $69.7 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 5, 1994, 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. Prior to May 5, 1994, Boston Advisors served as the Fund's adminis-
trator.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securi-
ties as may be sold to the public. Pursuant to a plan of distribution
adopted by the Fund under Rule 12b-1 under the 1940 Act (the "Plan"),
Smith Barney is paid a service fee with respect to Class A, Class B and
Class C shares of the Fund at the annual rate of 0.25% of the average
daily net assets of the respective Class. Smith Barney is also paid a dis-
tribution fee with respect to Class B and Class C shares at the annual
rate of 0.50% and 0.45%, respectively, of the average daily net assets at-
tributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no
longer be subject to distribution fees. The fees are used by Smith Barney
to pay its Financial Consultants for servicing shareholder accounts and,
in the case of Class B and Class C shares, to cover expenses primarily in-
tended to result in the sale of those shares. These expenses include: ad-
vertising expenses; the cost of printing and mailing prospectuses to po-
tential investors; payments to and expenses of Smith Barney Financial Con-
sultants and other persons who provide support services in connection with
the distribution of shares; interest and/or carrying charges; and indirect
and overhead costs of Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales promotion
expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at
the time of sale and, with respect to Class A, Class B and Class C shares,
a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Smith Barney Financial Con-
sultants may receive different levels of compensation for selling differ-
ent Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney, and the
payments may exceed distribution expenses actually incurred. The Company's
Board of Directors will evaluate the appropriateness of the Plan and its
payment terms on a continuing basis and in doing so will consider all rel-
evant factors, including expenses borne by Smith Barney, amounts received
under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles
of Incorporation dated September 29, 1981, as amended from time to time.
The Fund offers shares of common stock currently classified into four
Classes, A, B, C and Y, with a par value of $.001 per share. Each Class of
shares has the same rights, privileges and preferences, except with re-
spect to: (a) the designation of each Class; (b) the effect of the respec-
tive sales charges, if any, for each Class; (c) the distribution and/or
service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Board of Directors does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes of shares of the Fund. The Directors, on an ongoing
basis, will consider whether any such conflict exists and, if so, take ap-
propriate action.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, is located at One Boston Place, Boston, Massachusetts 02108,
and serves as custodian of the Company's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Company's transfer agent.
The Company does not hold annual shareholder meetings. There normally will
be no meeting of shareholders for the purpose of electing Directors unless
and until such time as less than a majority of the Directors holding of-
fice have been elected by shareholders. The Directors will call a meeting
for any purpose upon written request of shareholders holding at least 10%
of the Company's outstanding shares and the Company will assist sharehold-
ers in calling such a meeting as required by the 1940 Act. When matters
are submitted for shareholder vote, shareholders of each Class will have
one vote for each full share owned and a proportionate fractional vote for
any fractional share held of that Class. Generally, shares of the Company
will be voted on a Company-wide basis on all matters except matters af-
fecting only the interests of one Fund or one Class of shares.
The Fund sends each of its shareholders a semi-annual report and an
audited annual report, which include listings of the investment securities
held by the Fund at the end of the period covered. In an effort to reduce
the Fund's printing and mailing costs, the Company plans to consolidate
the mailing of its semi-annual and annual reports by household. This con-
solidation means that a household having multiple accounts with the iden-
tical address of record will receive a single copy of each report. In ad-
dition, the Company also plans to consolidate the mailing of its Prospec-
tuses so that a shareholder having multiple accounts (i.e., individual,
IRA and/or Self-Employed Retirement Plan accounts) will receive a single
Prospectus annually. Shareholders who do not want this consolidation to
apply to their accounts should contact their Smith Barney Financial Con-
sultants or TSSG.
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
SMITH BARNEY INVESTMENT FUNDS INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended December 31,
1994 and the Reports of Independent Accountants dated February 10, 1995 are
incorporated by reference to the Rule 30(b)2-1 filed on February 27, 1995
as Accession # 0000053798-95-000098.
Included in Part C:
Consent of Auditors
(b) Exhibits
All references are to the Registrant's registration
statement on Form N-1A (the "Registration Statement") as
filed with the SEC on October 2, 1981 (File Nos. 2-74288 and
811-3275).
(1) Articles of Restatement dated September 17, 1993 to Registrant's
Articles of Incorporation dated September 28, 1981, Articles of Amendment
dated October 14, 1994, Articles Supplementary, Articles of Amendments and
Certificates of Correction dated November 7, 1994 are incorporated by
reference to Post-Effective Amendment No. 37 to the Registration Statement
filed on November 7, 1994 ("Post-Effective Amendment No. 37").
(2) Registrant's By-Laws, as amended on September 30, 1992 are
incorporated by reference to Post-Effective Amendment No. 30 to the
Registration Statement filed on April 30, 1993.
(3) Not Applicable.
(4) Registrant's form of stock certificate for Class A, Class B and Class
D are incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(5)(a) Investment Advisory Agreement dated July 30, 1993, between the
Registrant on behalf of Smith Barney Shearson Investment Grade Bond Fund,
Smith Barney Shearson Government Securities Fund and Smith Barney Shearson
Special Equities Fund and Greenwich Street Advisors is incorporated by
reference to the Registration Statement filed on Form N-14 on September 2,
1993. File No. 33-50153.
(b) Investment Advisory Agreement dated April 8, 1994, between the
Registrant on behalf of Smith Barney Shearson European Fund and Smith,
Barney Advisers, Inc. is incorporated by reference to Post-Effective
Amendment No. 35 to the Registration Statement filed on June 23, 1994.
(c) Transfer of Investment Advisory Agreement dated November 7,
1994, between the Registrant, Greenwich Street Advisors and Smith Barney
Mutual Funds Management Inc. ("SBMFM") on behalf of Smith Barney Investment
Grade Bond Fund, Smith Barney Government Securities Fund and Smith Barney
Special Equities Fund will be filed by amendment.
(d) Transfer of Investment Advisory Agreement dated November 7,
1994, between the Registrant, Smith, Barney Advisers, Inc. ("SBA") and
SBMFM on behalf of Smith Barney European Fund will be filed by amendment.
(e) Investment Advisory Agreements on behalf of Smith Barney Growth
Opportunity Fund and Smith Barney Managed Growth Fund will be filed by
amendment.
(6)(a) Distribution Agreement dated July 30, 1993, between the
Registrant and Smith Barney Shearson Inc. is incorporated by reference to
the registration statement filed on Form N-14 on September 2, 1993. File
No. 33-50153.
(b) Supplement to the Distribution Agreement between the Registrant
and Smith Barney Inc. on behalf of Smith Barney Growth Opportunity Fund and
Smith Barney Managed Growth Fund will be filed by amendment.
(7) Not Applicable.
(8)(a) Custodian Agreement with Boston Safe Deposit and Trust
Company is incorporated by reference to Post-Effective Amendment No. 20 as
filed on September 6, 1988.
(b) Custodian Agreement with PCN Bank, National Associates will be
filed by amendment.
(9)(a) Administration Agreement dated May 5, 1994, between the
Registrant and SBA is incorporated by reference to Post-Effective Amendment
No. 37.
(b) Sub-Administration Agreement dated May 5, 1994, between the
Registrant, SBA and The Boston Company Advisors, Inc. is incorporated by
reference to Post-Effective Amendment No. 37.
(c) Transfer Agency and Registrar Agreement dated August 5, 1993 with The
Shareholder Services Group, Inc. ("TSSG") is incorporated by reference to
Post-Effective Amendment No. 31 as filed on December 22, 1993 ("Post-
Effective Amendment No. 31").
(d) Supplement to the Transfer Agency and Registrar Agreement between the
Registrant and TSSG on behalf of Smith Barney Growth Opportunity Fund and
Smith Barney Managed Growth Fund will be filed by amendment.
(10) Not Applicable.
(11) Consent of Independent Accountants is filed herein.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15)(a) Amended Services and Distribution Plans pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Investment Grade Bond
Fund, Smith Barney Government Securities Fund, Smith Barney Special
Equities Fund and Smith Barney European Fund and Smith Barney, Inc. ("Smith
Barney") are incorporated by reference to Post-Effective Amendment No. 37.
(b) Form of Services and Distribution Plans pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Growth Opportunity Fund
and Smith Barney Managed Growth Fund will be filed by amendment.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 22 as filed on May 1, 1989.
(17) Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 31.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders as of December 16, 1994
Common Stock par value Class A Class B
Class C
$.001 per share
Special Equities
Fund
19,802
16,093
61
Investment Grade
Bond Fund
16,952
16,168
44
Government
Securities Fund
35,421
12,763
32
European Fund
1,960
4,709
5
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-
Effective Amendment No. 1 to the registration statement filed on Form N-14
on October 8, 1993 (File No. 33-50153).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith, Barney Advisers, Inc. ("SBMFM")
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings") (formerly known as Smith Barney Shearson Holdings Inc.), which
in turn is a wholly owned subsidiary of The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers"). SBMFM is registered as an
investment adviser under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBMFM pursuant to the Advisers Act
(SEC File No. 801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street
Advisors served as investment adviser. Greenwich Street Advisors, through
its predecessors, has been in the investment counseling business since 1934
and is a division of Mutual Management Corp. ("MMC"). MMC was incorporated
in 1978 and is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.) ("Holdings"), which
is in turn a wholly owned subsidiary of The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers"). The list required by this Item 28
of officers and directors of MMC and Greenwich Street Advisors, together
with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two fiscal years, is incorporated by reference to
Schedules A and D of FORM ADV filed by MMC on behalf of Greenwich Street
Advisors pursuant to the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc.
(formerly known as Smith Barney Shearson Inc.) acquired the domestic retail
brokerage and asset management business of Shearson Lehman Brothers, which
included the business of the Registrant's prior investment adviser.
Shearson Lehman Brothers was a wholly owned subsidiary of Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All of the issued and
outstanding common stock of Shearson Holdings (representing 92% of the
voting stock) was held by American Express Company. Information as to any
past business vocation or employment of a substantial nature engaged in by
officers and directors of Shearson Lehman Advisors can be located in
Schedules A and D of FORM ADV filed by Shearson Lehman Brothers on behalf
of Shearson Lehman Advisors prior to July 30, 1993. (SEC FILE NO. 801-
3701)
2/14/95
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney Managed Governments
Fund Inc., Smith Barney Income Funds, Smith Barney Equity Funds, Smith
Barney Investment Funds Inc., Smith Barney Precious Metals and Minerals
Fund Inc., Smith Barney Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey Municipals Fund Inc., The USA
High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., Smith
Barney Fundamental Value Fund Inc., Smith Barney Series Fund, Consulting
Group Capital Markets Funds, Smith Barney Income Trust, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney Florida Municipals
Fund, Smith Barney Oregon Municipals Fund, Smith Barney Funds, Inc., Smith
Barney Muni Funds, Smith Barney World Funds, Inc., Smith Barney Money
Funds, Inc., Smith Barney Tax Free Money Fund, Inc., Smith Barney Variable
Account Funds, Smith Barney U.S. Dollar Reserve Fund (Cayman), Worldwide
Special Fund, N.V., Worldwide Securities Limited, (Bermuda), Smith Barney
International Fund (Luxembourg) and various series of unit investment
trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc. (formerly known as Smith Barney Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney changed its
name from Smith Barney Shearson Inc. to its current name. The information
required by this Item 29 with respect to each director, officer and partner
of Smith Barney is incorporated by reference to Schedule A of FORM BD filed
by Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC File
No. 812-8510).
11/4/94
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(4) Boston Safe Deposit
and Trust Company
One Boston Place
Boston, MA 02108
(5) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA
(6) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
The Registrant hereby undertakes to furnish to each person to whom a
prospectus of any series of the Registrant is delivered a copy of the
Registrant's latest annual report, upon request and without charge.
485(b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, SMITH BARNEY INVESTMENT FUNDS INC., has duly caused
this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the
City of New York, State of New York on the 28th day of February,
1995.
SMITH BARNEY
INVESTMENT FUNDS INC.
By: /s/ Heath B.
McLendon*
Heath B. McLendon
Chief Executive Officer
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the 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
2/28/95
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone* Senior Vice President and
2/28/95
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
Signature Title Date
/s/ Paul R. Ades * Director 2/28/95
Paul R. Ades
/s/ Herbert Barg* Director 2/28/95
Herbert Barg
/s/ Alger B. Chapman* Director 2/28/95
Alger B. Chapman
/s/ Dwight B. Crane* Director 2/28/95
Dwight B. Crane
/s/ Frank Hubbard* Director
2/28/95
Frank Hubbard
/s/ Allan R. Johnson* Director 2/28/95
Allan R. Johnson
/s/ Ken Miller* Director 2/28/95
Ken Miller
/s/ John F. White* Director 2/28/95
John F. White
*Signed by Lee D. Augsburger, their duly authorized attorney-in-
fact, pursuant to power of attorney dated November 3, 1994.
/s/ Lee D. Augsburger
Lee D. Augsburger
SLIV/PEAS/PEA#39/pea39.doc
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Smith Barney Investment Funds Inc.:
We hereby consent to the following with respect to
Post-Effective Amendment No. 39 to the Registration Statement on
Form N-1A (File No. 2-74288) under the Securities Act of 1933,
as amended, of Smith Barney Investment Funds Inc. (formerly
Smith Barney Shearson Investment Funds Inc.):
1. The incorporation by reference of our reports dated February
10, 1995 accompanying the Annual Reports for the fiscal year
ended December 31, 1994 of Investment Grade Bond Fund,
Government Securities Fund, Special Equities Fund, and European
Fund, in the Statement of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the Prospectuses.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<EXPENSES-NET> 3,805,492
<NET-INVESTMENT-INCOME> (2,749,410)
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,793,583
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 270,779
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<GROSS-EXPENSE> 3,805,492
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<PER-SHARE-NII> (0.13)
<PER-SHARE-GAIN-APPREC> (1.00)
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<PER-SHARE-NAV-END> 19.10
<EXPENSE-RATIO> 1.49
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Smith Barney Special Equities Fund - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 166,951,531
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<OVERDISTRIBUTION-GAINS> 5,862,432
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<NET-ASSETS> 196,500,630
<DIVIDEND-INCOME> 291,049
<INTEREST-INCOME> 765,033
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<EXPENSES-NET> 3,805,492
<NET-INVESTMENT-INCOME> (2,749,410)
<REALIZED-GAINS-CURRENT> (5,296,726)
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<NET-CHANGE-FROM-OPS> (11,415,630)
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<NUMBER-OF-SHARES-SOLD> 6,054,365
<NUMBER-OF-SHARES-REDEEMED> 7,958,837
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,793,583
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 270,779
<GROSS-ADVISORY-FEES> 1,052,635
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,805,492
<AVERAGE-NET-ASSETS> 191,388,129
<PER-SHARE-NAV-BEGIN> 20.08
<PER-SHARE-NII> (0.27)
<PER-SHARE-GAIN-APPREC> (0.99)
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<PER-SHARE-NAV-END> 18.82
<EXPENSE-RATIO> 2.21
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Smith Barney Special Equities Fund - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 166,951,531
<INVESTMENTS-AT-VALUE> 198,846,796
<RECEIVABLES> 4,492,822
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<TOTAL-ASSETS> 203,340,161
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<PAID-IN-CAPITAL-COMMON> 170,467,797
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<SHARES-COMMON-PRIOR> 9,212
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<OVERDISTRIBUTION-GAINS> 5,862,432
<ACCUM-APPREC-OR-DEPREC> 31,895,265
<NET-ASSETS> 196,500,630
<DIVIDEND-INCOME> 291,049
<INTEREST-INCOME> 765,033
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<EXPENSES-NET> 3,805,492
<NET-INVESTMENT-INCOME> (2,749,410)
<REALIZED-GAINS-CURRENT> (5,296,726)
<APPREC-INCREASE-CURRENT> (3,369,494)
<NET-CHANGE-FROM-OPS> (11,415,630)
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<NUMBER-OF-SHARES-SOLD> 75,807
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 270,779
<GROSS-ADVISORY-FEES> 1,052,635
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,805,492
<AVERAGE-NET-ASSETS> 191,388,129
<PER-SHARE-NAV-BEGIN> 20.08
<PER-SHARE-NII> (0.25)
<PER-SHARE-GAIN-APPREC> (1.01)
<PER-SHARE-DIVIDEND> 0.00
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<PER-SHARE-NAV-END> 18.82
<EXPENSE-RATIO> 2.15
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Smith Barney Investment Grade Bond Fund - Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 437,931,193
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<TOTAL-ASSETS> 407,635,090
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<ACCUMULATED-NII-CURRENT> 0
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<OVERDISTRIBUTION-GAINS> 859,600
<ACCUM-APPREC-OR-DEPREC> (41,529,392)
<NET-ASSETS> 403,452,696
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,216,097
<OTHER-INCOME> 0
<EXPENSES-NET> 6,455,334
<NET-INVESTMENT-INCOME> 29,760,763
<REALIZED-GAINS-CURRENT> 2,616,051
<APPREC-INCREASE-CURRENT> (76,397,864)
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<DISTRIBUTIONS-OF-INCOME> 4,485,918
<DISTRIBUTIONS-OF-GAINS> 5,098,443
<DISTRIBUTIONS-OTHER> 173,244
<NUMBER-OF-SHARES-SOLD> 16,784,949
<NUMBER-OF-SHARES-REDEEMED> 1,245,217
<SHARES-REINVESTED> 679,207
<NET-CHANGE-IN-ASSETS> (82,899,815)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 7,840,829
<OVERDISTRIB-NII-PRIOR> 212,081
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,926,359
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<GROSS-EXPENSE> 6,455,334
<AVERAGE-NET-ASSETS> 428,079,672
<PER-SHARE-NAV-BEGIN> 13.01
<PER-SHARE-NII> 0.74
<PER-SHARE-GAIN-APPREC> (1.88)
<PER-SHARE-DIVIDEND> 0.86
<PER-SHARE-DISTRIBUTIONS> 0.31
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Smith Barney Investment Grade Bond Fund - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 437,931,193
<INVESTMENTS-AT-VALUE> 396,401,801
<RECEIVABLES> 11,232,667
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<OTHER-ITEMS-ASSETS> 622
<TOTAL-ASSETS> 407,635,090
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<OTHER-ITEMS-LIABILITIES> 4,182,394
<TOTAL-LIABILITIES> 4,182,394
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 445,841,688
<SHARES-COMMON-STOCK> 20,725,884
<SHARES-COMMON-PRIOR> 36,588,263
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 859,600
<ACCUM-APPREC-OR-DEPREC> (41,529,392)
<NET-ASSETS> 403,452,696
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,216,097
<OTHER-INCOME> 0
<EXPENSES-NET> 6,455,334
<NET-INVESTMENT-INCOME> 29,760,763
<REALIZED-GAINS-CURRENT> 2,616,051
<APPREC-INCREASE-CURRENT> (76,397,864)
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 25,035,743
<DISTRIBUTIONS-OF-GAINS> 6,190,272
<DISTRIBUTIONS-OTHER> 949,145
<NUMBER-OF-SHARES-SOLD> 5,403,618
<NUMBER-OF-SHARES-REDEEMED> 23,258,589
<SHARES-REINVESTED> 1,992,592
<NET-CHANGE-IN-ASSETS> (82,899,815)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 7,840,829
<OVERDISTRIB-NII-PRIOR> 212,081
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,926,359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,455,334
<AVERAGE-NET-ASSETS> 428,079,672
<PER-SHARE-NAV-BEGIN> 13.01
<PER-SHARE-NII> 0.82
<PER-SHARE-GAIN-APPREC> (2.02)
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<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 1.57
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Smith Barney Investment Grade Bond Fund - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 437,931,193
<INVESTMENTS-AT-VALUE> 396,401,801
<RECEIVABLES> 11,232,667
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<OTHER-ITEMS-ASSETS> 622
<TOTAL-ASSETS> 407,635,090
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<OTHER-ITEMS-LIABILITIES> 4,182,394
<TOTAL-LIABILITIES> 4,182,394
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<PAID-IN-CAPITAL-COMMON> 445,841,688
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 859,600
<ACCUM-APPREC-OR-DEPREC> (41,529,392)
<NET-ASSETS> 403,452,696
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,216,097
<OTHER-INCOME> 0
<EXPENSES-NET> 6,455,334
<NET-INVESTMENT-INCOME> 29,760,763
<REALIZED-GAINS-CURRENT> 2,616,051
<APPREC-INCREASE-CURRENT> (76,397,864)
<NET-CHANGE-FROM-OPS> (44,021,050)
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<DISTRIBUTIONS-OF-INCOME> 27,021
<DISTRIBUTIONS-OF-GAINS> 27,765
<DISTRIBUTIONS-OTHER> 1,041
<NUMBER-OF-SHARES-SOLD> 82,608
<NUMBER-OF-SHARES-REDEEMED> 9,852
<SHARES-REINVESTED> 4,936
<NET-CHANGE-IN-ASSETS> (82,899,815)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 7,840,829
<OVERDISTRIB-NII-PRIOR> 212,081
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,926,359
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<GROSS-EXPENSE> 6,455,334
<AVERAGE-NET-ASSETS> 428,079,672
<PER-SHARE-NAV-BEGIN> 13.01
<PER-SHARE-NII> 0.75
<PER-SHARE-GAIN-APPREC> (1.95)
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<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Smith Barney European Fund - Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 31,074,885
<INVESTMENTS-AT-VALUE> 34,622,500
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<OTHER-ITEMS-ASSETS> 601,493
<TOTAL-ASSETS> 35,447,944
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<OTHER-ITEMS-LIABILITIES> 217,539
<TOTAL-LIABILITIES> 217,539
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<PAID-IN-CAPITAL-COMMON> 32,950,127
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<OVERDISTRIBUTION-NII> 10,271
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1,253,910
<ACCUM-APPREC-OR-DEPREC> 3,544,459
<NET-ASSETS> 35,230,405
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<INTEREST-INCOME> 99,963
<OTHER-INCOME> 0
<EXPENSES-NET> 1,237,197
<NET-INVESTMENT-INCOME> (292,343)
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<NUMBER-OF-SHARES-SOLD> 1,041,259
<NUMBER-OF-SHARES-REDEEMED> 641,546
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,174,961)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1,923,050
<GROSS-ADVISORY-FEES> 278,074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,237,197
<AVERAGE-NET-ASSETS> 39,683,478
<PER-SHARE-NAV-BEGIN> 14.47
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> (0.33)
<PER-SHARE-DIVIDEND> 0.00
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<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.12
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Smith Barney European Fund - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 31,074,885
<INVESTMENTS-AT-VALUE> 34,622,500
<RECEIVABLES> 223,951
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 601,493
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<OTHER-ITEMS-LIABILITIES> 217,539
<TOTAL-LIABILITIES> 217,539
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,950,127
<SHARES-COMMON-STOCK> 2,001,869
<SHARES-COMMON-PRIOR> 2,479,040
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 10,271
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1,253,910
<ACCUM-APPREC-OR-DEPREC> 3,544,459
<NET-ASSETS> 35,230,405
<DIVIDEND-INCOME> 844,891
<INTEREST-INCOME> 99,963
<OTHER-INCOME> 0
<EXPENSES-NET> 1,237,197
<NET-INVESTMENT-INCOME> (292,343)
<REALIZED-GAINS-CURRENT> 609,825
<APPREC-INCREASE-CURRENT> (1,445,473)
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<NUMBER-OF-SHARES-SOLD> 2,781,395
<NUMBER-OF-SHARES-REDEEMED> 3,258,566
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,174,961)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1,923,050
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<AVERAGE-NET-ASSETS> 39,683,478
<PER-SHARE-NAV-BEGIN> 14.40
<PER-SHARE-NII> (0.12)
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<PER-SHARE-NAV-END> 13.95
<EXPENSE-RATIO> 3.19
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Smith Barney European Fund - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<INVESTMENTS-AT-COST> 31,074,885
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,950,127
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<SHARES-COMMON-PRIOR> 1
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<NET-INVESTMENT-INCOME> (292,343)
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<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,174,961)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1,923,050
<GROSS-ADVISORY-FEES> 278,074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,237,197
<AVERAGE-NET-ASSETS> 39,683,478
<PER-SHARE-NAV-BEGIN> 14.41
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> (0.43)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.95
<EXPENSE-RATIO> 3.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
