As filed with the Securities and Exchange Commission
on August 9 , 1996
Registration No.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No.[1] [ ]
Post-Effective
Amendment No.
SMITH BARNEY INVESTMENT FUNDS INC.
(Exact name of Registrant as
specified in
Charter)
Area Code and Telephone Number: (800) 224-7523
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street New York, New York 10013 (22nd floor)
(Name and address of agent for service)
copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Approximate date of proposed public offering: As soon as possible
after the
effective date of this
Registration Statement.
Registrant has registered an indefinite amount of securities
pursuant to Rule
24f-2 under the Investment
Company Act of 1940, as amended; accordingly, no fee is payable
herewith.
Registrant's Rule 24f-2
Notice for the fiscal period ended December 31, 1995 was filed
with the
Securities and Exchange
Commission on February 29, 1996.
Registrant hereby amends this Registration Statement on such date
or dates as
may be necessary to
delay its effective date until the Registrant shall file a further
amendment
which specifically states that
this Registration Statement shall thereafter become effective in
accordance
with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall
become
effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
SMITH BARNEY INVESTMENT FUNDS INC.
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and
documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
Prospectus/Proxy
Part A Item No. and Caption Statement Caption
Item 1. Beginning of Registration Cover Page;
Cross
Reference
Statement and Outside Front Sheet
Cover Page of Prospectus
Item 2. Beginning and Outside Back Table of
Contents
Cover Page of Prospectus
Item 3. Fee Table,Synopsis Information and Summary;
Risk Factors;
Comparison of
Risk Factors Investment
Objectives and
Policies
Item 4. Information About the Transaction Summary:
Reasons for the
Reorganization;
Information About the
Reorganization;
Information on
Shareholder's Rights;
Exhibit A (Agreement and
Plan of
Reorganization)
Item 5. Information About the Registrant Cover Page;
Summary;
Information About
the Reorganization;
Comparison of
Investment Objectives
and Policies;
Comparative Information
on
Shareholder's
Rights; Additional
Information About
the
Telecommunications
Growth Fund and
Special
Equities Fund.
Prospectuses of both
the
Acquiring Fund and the
Acquired Fund
dated April 29, 1996.
Item 6. Information About the Summary;
Information
About the
Company Being Acquired Reorganization;
Comparison of
Investment
Objectives and Policies;
Information
on
Shareholder's Rights;
Additional
Information About the
Telecommunications
Growth Fund
Item 7. Voting Information Summary;
Information
About the
Reorganization;
Comparative
Information
on Shareholder's Rights;
Voting
Information
Item 8. Interest of Certain Persons Financial
Statements and
Experts; Legal
and Experts Matters
Item 9. Additional Information Not
Applicable
Required for Reoffering By
Persons Deemed to be Underwriters
Statement of Additional
Part B Item No. and Caption Information
Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Information Cover Page;
Statement of
Additional
About the Registrant Information
of Smith
Barney Investment
Funds Inc. dated April
29, 1996
Item 13. Additional Information Not Applicable
About the Company Being
Acquired
Item 14. Financial Statements Annual Report of
the
Telecommunications Trust
dated December 31, 1995;
Annual
Report of
Smith Barney Special
Equities Fund
dated
December 31, 1995 ; Pro
forma
Financial
Statements
Part C Item No. and Caption Other Information
Caption
Item 15. Indemnification Incorporated by
reference to
Part A
caption "Comparative
Information on
Shareholder's Rights -
Liability of
Directors"
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
SMITH BARNEY TELECOMMUNICATIONS TRUST
388 Greenwich Street
New York, New York 10013
[ ],1996
Dear Shareholder:
The Board of Trustees of Smith Barney Telecommunications Trust
(the "Trust"),
has recently
reviewed and unanimously endorsed a proposal for the
reorganization of the
Smith Barney
Telecommunications Growth Fund (the "Telecommunications Growth
Fund"), a
separate series of the
Trust, which it judges to be in the best interests of the
Telecommunications
Growth Fund
shareholders.
Under the terms of the proposed reorganization, the Smith Barney
Special
Equities Fund (the
"Special Equities Fund"), a separate series of Smith Barney
Investment Funds
Inc., would acquire
substantially all of the assets and liabilities of the
Telecommunications
Growth Fund. After the
transaction, the Telecommunications Growth Fund would be dissolved
and you
would become a
shareholder of the Special Equities Fund, having received shares
with an
aggregate net asset value
equivalent to the aggregate net asset value of your
Telecommunications Growth
Fund investment at
the time of the transaction. The transaction would, in the
opinion of
counsel, be free from Federal
income taxes to you and the Telecommunications Growth Fund.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
The Board of Trustees of the Trust has determined that the
proposed
reorganization should
provide benefits to the Telecommunications Growth Fund
shareholders due, in
part, to savings in
expenses borne by shareholders. We have therefore called a
Special Meeting of
Shareholders to be
held on September 19, 1996 to consider this transaction. We
strongly urge
your participation by
asking you to review, complete and return your proxy promptly.
Detailed information about the proposed transaction is described
in the
enclosed proxy statement.
On behalf of the Board, I thank you for your participation as a
shareholder
and urge you to please
exercise your right to vote by completing, dating and signing the
enclosed
proxy card. A self-
addressed, postage-paid envelope has been enclosed for your
convenience. If
you sign and date your
proxy card, but do not provide voting instructions, your shares
will be voted
FOR the proposal.
If you have any questions regarding the proposed transaction,
please feel free
to call your
Financial Consultant.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED
PROMPTLY. THE BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED AND
RECOMMENDS VOTING FOR THIS TRANSACTION.
Sincerely,
Heath
B.
McLendon
Chairman of the Board
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On September 19, 1996
___________________
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting")
of Smith Barney
Telecommunications Growth Fund (the "Telecommunications Growth
Fund"), will be
held at 388
Greenwich Street, New York, New York on September 19,1996, at [ ]
p.m. for
the following purposes:
1. To consider and act upon the Agreement and Plan of
Reorganization (the
"Plan") dated as
of August [ ], 1996 providing for: (i) the acquisition of
substantially all
of the assets of the
Telecommunications Growth Fund by the Special Equities Fund of the
Smith
Barney
Investment Funds Inc. (the "Special Equities Fund") in exchange
for shares of
the Special
Equities Fund and the assumption by the Special Equities Fund of
substantially
all of the
liabilities of the Telecommunications Growth Fund; (ii) the
distribution of
such shares of
the Special Equities Fund to shareholders of the
Telecommunications Growth
Fund in
liquidation of the Telecommunications Growth Fund; and (iii) the
subsequent
termination
of the Telecommunications Growth Fund.
2. To transact any other business which may properly come
before the
Meeting or any
adjournment thereof.
The Trustees of the Telecommunications Growth Fund have approved
the
transactions and have fixed
the close of business on July 29,1996, as the record date for the
determination of shareholders of the
Telecommunications Growth Fund entitled to notice of and to vote
at this
Meeting or any adjournment
thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS
WHO
DO NOT EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN
WITHOUT
DELAY THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES
NO
POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AT THE MEETING.
INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET FORTH ON
THE
FOLLOWING PAGE. PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY
ARE
EXERCISED BY THE SUBSEQUENT EXECUTION AND SUBMISSION OF A REVISED
PROXY,
BY GIVING WRITTEN NOTICE OF REVOCATION TO THE TELECOMMUNICATIONS
GROWTH FUND AT ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING
IN
PERSON AT THE MEETING.
By order of
the
Trustees
Christina T.
Sydor
Secretary
[ ], 1996
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL
HELP
TO
AVOID THE EXPENSE OF FURTHER SOLICITATION.
PROSPECTUS/PROXY STATEMENT DATED [ ], 1996
Acquisition of the Assets Of
SMITH BARNEY TELECOMMUNICATIONS TRUST--TELECOMMUNICATIONS
GROWTH FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
By And In Exchange For Shares Of
SMITH BARNEY INVESTMENT FUNDS INC.-- SPECIAL EQUITIES FUND
388 Greenwich Street
New York, New York 10013
(212) 720-9150
This Prospectus/Proxy Statement is being furnished to
shareholders of
Smith Barney
Telecommunications Growth Fund (the "Telecommunications Growth
Fund"), a
separate series of Smith
Barney Telecommunications Trust (the "Trust"), in connection with
a proposed
Agreement and Plan of
Reorganization (the "Plan"), to be submitted to shareholders for
consideration
at a Special Meeting of
Shareholders to be held on September 19, 1996 at [ ] p.m., New
York City
time, at the offices of Smith
Barney Inc., located at 388 Greenwich Street, [ ]nd Floor, New
York, New
York, and any adjournments
thereof (collectively, the "Meeting"). The Plan provides for all
of the
assets of the Telecommunications
Growth Fund to be acquired by the Smith Barney Special Equities
Fund (the
"Special Equities Fund"), a
separate series of Smith Barney Investment Funds Inc. (the
"Investment
Funds"), in exchange for shares of
the Special Equities Fund and the assumption by the Special
Equities Fund of
certain liabilities of the
Telecommunications Growth Fund (hereinafter referred to as the
"Reorganization"). (The
Telecommunications Growth Fund and the Special Equities Fund are
herein
referred to individually as a
"Fund" and collectively as the "Funds"). Following the
Reorganization, shares
of the Special Equities Fund
will be distributed to shareholders of the Telecommunications
Growth Fund in
liquidation of the
Telecommunications Growth Fund and the Telecommunications Growth
Fund will be
dissolved. As a
result of the proposed Reorganization, each shareholder of the
Telecommunications Growth Fund will
receive that number of shares of the Special Equities Fund having
an aggregate
net asset value equal to the
aggregate net asset value of such shareholder's shares of the
Telecommunications Growth Fund. Holders
of Class A shares in the Telecommunications Growth Fund will
receive Class A
shares of the Special
Equities Fund, and no sales charge will be imposed on the Class A
shares of
the Special Equities Fund
received by the Telecommunications Growth Fund Class A
shareholders. Holders
of Class B and Class C
shares in the Telecommunications Growth Fund will receive Class B
and Class C
shares, respectively, of
the Special Equities Fund; any contingent deferred sales charge
("CDSC") which
is applicable to a
shareholder's investment will continue to apply, and, in
calculating the
applicable CDSC payable upon the
subsequent redemption of Class B or Class C shares of the Special
Equities
Fund, the period during which
a Telecommunications Growth Fund shareholder held Class B or Class
C shares of
the
Telecommunications Growth Fund will be counted. This transaction
is being
structured as a tax-free
reorganization.
The Special Equities Fund is an open-end diversified
management
investment company whose
investment objective is to seek long-term capital appreciation by
investing
primarily in equity securities
which the investment adviser believes have superior appreciation
potential.
The Telecommunications
Growth Fund is an open-end non-diversified investment management
company whose
investment objective
is to achieve capital appreciation, with income as a secondary
consideration,
by investing primarily in
equity securities of companies engaged in the telecommunications
industry.
Each Fund invests primarily,
but not exclusively, in equity securities (common and preferred
stock). Smith
Barney Mutual Funds
Management Inc. ("SBMFM"), a subsidiary of Smith Barney Holdings,
Inc.
("Holdings"); serves as
investment manager to the Special Equities Fund and Smith Barney
Strategy
Advisers Inc. ("Strategy
Advisers") also a subsidiary of Holdings, serves as the investment
manager of
the Telecommunications
Growth Fund.
The investment policies of the Special Equities Fund are
generally
similar to those of the
Telecommunications Growth Fund. However, certain differences in
the Funds'
investment policies are
described under "Comparison of Investment Objectives and Policies"
in this
Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained
for future
reference, sets forth
concisely
information about the Special Equities Fund that a prospective
investor should
know before investing.
Certain relevant documents listed below, which have been filed
with the
Securities and Exchange
Commission ("SEC"), are incorporated by reference. A Statement of
Additional
Information dated [
], 1996 relating to this Prospectus/Proxy Statement
and the
Reorganization, has been filed with
the SEC and is incorporated by reference into this
Prospectus/Proxy Statement.
A copy of such Statement
of Additional Information and the Telecommunications Growth Fund
Prospectus
referred to below are
available upon request and without charge by writing to the
Telecommunications
Growth Fund at the
address listed on the cover page of this Prospectus/Proxy
Statement or by
calling (800) ].
1. The Prospectus dated April 29, 1996, as supplemented on June
21, 1996
and July 12,
1996, of the Special Equities Fund is incorporated in its entirety
by
reference and a
copy is included herewith.
2. The Prospectus dated April 29, 1996, as supplemented on May
7, 1996, of
the
Telecommunications Growth Fund is incorporated in its entirety by
reference.
Also accompanying this Prospectus/Proxy
Statement as Exhibit
A is a copy of the
Plan for the proposed transaction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF
THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY
IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Additional Materials
6
Summary
10
Risk Factors
13
Reasons for the Reorganization
14
Information about the Reorganization
14
Information about the Special Equities Fund
18
Information about the Telecommunications Growth Fund
19
Comparison of Investment Objectives and Policies
23
Comparative Information on Shareholders' Rights
26
Additional Information About the Special Equities Fund
and
the Telecommunications Growth Fund
28
Other Business
29
Voting Information
29
Financial Statements and Experts
34
Legal Matters
34
Exhibit A: Agreement and Plan of Reorganization
A-1
ADDITIONAL MATERIALS
The following additional materials, which have been
incorporated by
reference into the Statement
of
Additional Information dated [ ], 1996 relating to this
Prospectus/Proxy Statement and the
Reorganization, will be sent to all shareholders requesting a copy
of such
Statement of Additional
Information.
1. Statement of Additional Information of Investment Funds Inc.
dated April
29, 1996.
2. Annual Report of Special Equities Funds Inc. dated December
31, 1995.
3. Annual Report of Telecommunications Growth Fund dated
December 31, 1995.
4. Pro forma financial statements.
FEE TABLES
Following are tables showing current costs and expenses of
the
Telecommunications Growth Fund
and
the Special Equities Fund and the pro forma costs and expenses
expected to be
incurred by the Special
Equities Fund after giving effect to the Reorganization, each
based on the
maximum sales charge or
maximum CDSC that may be incurred at the time of purchase or
redemption.
CLASS A SHARES
Telecommunications Growth
Fund
Special Equities
Fund
Pro Forma***
Shareholder Transaction Expenses
Maximum sales charge imposed
on purchases (as a percentage of
offering price).................................
5.00%
5.00%
5.00%
Maximum CDSC (as a percentage
of original cost or redemption proceeds,
whichever is lower)..............
None*
None*
None*
Annual Operating Expenses
(as a percentage of average net
assets)
Management fees.............................
12b-1 fees.......................................
Other expenses................................
0.75%
0.25
0.27**
0.75%
0.25
0.15**
0.75%
0.25
0.15**
Total Operating Expenses
1.27%
1.15%
1.15%
____________________
* 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.
** "Other expenses" for Class A shares of the
Telecommunications Growth
Fund and the Special
Equities
Fund are based on
expenses for the six-month period ended June 30, 1996. Pro forma
financial
figures are based on estimated
expenses for
the six-month period ended June 30, 1996.
*** The pro forma financial figures are intended to provide
shareholders with
information about the
continuing
impact
of the Reorganization as if the Reorganization had taken place as
of June 30,
1996.
CLASS B SHARES
Telecommunications Growth
Fund
Special Equities
Fund
Pro Forma***
Shareholder Transaction Expenses
Maximum sales charge imposed
on purchases (as a percentage of
offering price).................................
None
None
None
Maximum CDSC (as a percentage
of original cost or redemption proceeds,
whichever is lower)..............
5.00%
5.00%
5.00%
Annual Operating Expenses
(as a percentage of average net
assets)
Management fees.............................
12b-1 fees*......................................
Other expenses**..............................
0.75%
1.00
0.33
0.75%
1.00
0.19
0.75%
1.00
0.19
Total Operating Expenses
2.08%
1.94%
1.94%
____________________
* Upon conversion of Class B shares to Class A shares, such
shares will no
longer be subject to a
distribution fee, but will be
subject to a 0.25% service fee.
** "Other expenses" for Class B shares of the
Telecommunications Growth
Fund and the Special
Equities
Fund are based on
expenses for the six-month period ended June 30, 1996. Pro forma
financial
figures are based on estimated
expenses for
the six-month period ended June 30, 1996.
*** The pro forma financial figures are intended to provide
shareholders with
information about the
continuing
impact
of the Reorganization as if the Reorganization had taken place as
of June 30,
1996.
CLASS C SHARES
Telecommunications Growth
Fund
Special Equities
Fund
Pro Forma***
Shareholder Transaction Expenses
Maximum sales charge imposed
on purchases (as a percentage of
offering price)............................................
None
None
None
Maximum CDSC (as a percentage
of original cost or redemption proceeds,
whichever is lower)...................................
1.00%
1.00%
1.00%
Annual Operating Expenses
(as a percentage of average net
assets)
Management fees......................................
12b-1 fees*...............................................
Other expenses**.....................................
0.75%
1.00
0.33
0.75%
1.00
0.20
0.75%
1.00
0.20
Total Operating Expenses
2.08%
1.95%
1.95%
____________________
* 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.
** "Other expenses" for Class C shares of the
Telecommunications Growth
Fund and the Special
Equities
Fund are based on
expenses for the six-month period ended June 30, 1996. Pro forma
financial
figures are based on estimated
expenses for
the six-month period ended June 30, 1996.
*** The pro forma financial figures are intended to provide
shareholders with
information about the
continuing
impact
of the Reorganization as if the Reorganization had taken place as
of June 30,
1996.
EXAMPLES
The following examples are intended to assist an investor in
understanding the
various costs that an
investor in the Funds will bear directly or indirectly. The
examples assume
payment by the Funds of
operating expenses at the levels set forth in the tables above.
1 year
3 years
5 years
10 years*
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A
Telecommunications Growth
Fund.....................................
Special Equities
Fund........................................................
Pro
Forma.............................................................
............
.
$62
61
61
$88
85
85
$116
110
110
$196
183
183
Class B
Telecommunications Growth
Fund.....................................
Special Equities
Fund........................................................
Pro
Forma.............................................................
............
.
$71
70
70
$95
91
91
$122
115
115
$220
206
206
Class C
Telecommunications Growth
Fund.....................................
Special Equities
Fund........................................................
Pro
Forma.............................................................
............
.
$31
30
30
$65
61
61
$112
105
105
$241
227
227
_________________________
* 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.
An investor would pay the following expenses on the same
investment,
assuming the same annual
return and no redemption:
1 year
3 years
5 years
10 years*
Class A
Telecommunications Growth Fund....................................
Special Equities
Fund.......................................................
Pro
Forma.............................................................
...........
$62
61
61
$88
85
85
$116
110
110
$196
183
183
Class B
Telecommunications Growth Fund....................................
Special Equities
Fund.......................................................
Pro
Forma.............................................................
............
$21
20
20
$65
61
61
$112
105
105
$220
206
206
Class C
Telecommunications Growth Fund....................................
Special Equities
Fund.......................................................
Pro
Forma.............................................................
...........
$21
20
20
$65
61
61
$112
105
105
$241
227
227
_________________________
* Ten-year figures assume conversion of Class B shares to Class A
shares at
the end of the eighth year
following
the date of purchase.
The examples also provide a means for 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%. These examples should not be considered a
representation
of past or future
expenses and actual expenses may be greater or less than those
shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional
information
contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of the
Special Equities
Fund dated April 29, 1996,as supplemented on June 21, 1996 and
July 12, 1996,
the Statement
of Additional Information of the Investment Funds, dated April 29,
1996, the
Prospectus of the
Telecommunications Growth Fund dated April 29, 1996, as
supplemented on May 7,
1996, and
the Statement of Additional Information of the Trust dated April
29, 1996, and
the Plan, a copy
of which is attached to this Prospectus/Proxy Statement as Exhibit
A
Proposed Reorganization. The Plan provides for the transfer of
all or
substantially all of the assets of
the Telecommunications Growth Fund in exchange for shares of the
Special
Equities Fund and the
assumption by the Special Equities Fund of substantially all
liabilities of
the Telecommunications Growth
Fund. The Plan also calls for the distribution of shares of the
Special
Equities Fund to the
Telecommunications Growth Fund shareholders in liquidation of the
Telecommunications Growth Fund.
As a result of the Reorganization, each shareholder of the
Telecommunications
Growth Fund will become
the owner of that number of full and fractional shares of the
Special Equities
Fund having an aggregate net
asset value equal to the aggregate net asset value of their shares
of the
Telecommunications Growth Fund,
as of the close of business on the date that the
Telecommunications Growth
Fund's assets are exchanged for
shares of the Special Equities Fund. (Shareholders of Class A,
Class B and
Class C shares of the
Telecommunications Growth Fund will receive Class A, Class B and
Class C
shares, respectively, of the
Special Equities Fund.) See "Information About the
Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the
Board of Trustees of the
Trust, on behalf of the Telecommunications Growth Fund, including
all of the
"non-interested" Trustees, as
that term is defined in the Investment Company Act of 1940, as
amended (the
"1940 Act"), has
unanimously concluded that the Reorganization would be in the best
interests
of the shareholders of the
Trust and that the interests of the Telecommunication Growth
Fund's existing
shareholders will not be
diluted as a result of the transaction contemplated by the
Reorganization, and
therefore has submitted the
Plan for approval by the Fund's shareholders. The Board of
Directors of the
Investment Funds has reached
similar conclusions and also recommends approval of the Plan
effecting the
Reorganization.
Approval of the Reorganization will require the affirmative vote
of a
majority, as defined in the
Investment Company Act of 1940 (the "1940 Act"), of the
outstanding shares of
the Telecommunications
Growth Fund, which is the lesser of (i) 67% of the voting
securities of the
Telecommunications Growth
Fund present at the Meeting, if the holders of more than 50% of
the
outstanding voting securities of the
Telecommunications Growth Fund are present or represented by
proxy, or (ii)
more than 50% of the
outstanding shares of the Telecommunications Growth Fund. For
purposes of
voting with respect to the
Reorganization, the Class A, Class B and Class C shares of the
Telecommunications Growth Fund will
vote together as a single class. No vote of the Special Equities
Fund is
required. See "Voting
Information."
Tax Consequences. Prior to completion of the Reorganization, the
Telecommunications Growth Fund
will have received an opinion from counsel that, upon the
Reorganization and
the transfer of the assets of
the Telecommunications Growth Fund, no gain or loss will be
recognized by the
Telecommunications
Growth Fund or its shareholders for Federal income tax purposes.
The holding
period and tax basis of
shares of the Special Equities Fund that are received by each
Telecommunications Growth Fund
shareholder will be the same as the holding period and tax basis
of the shares
of the Telecommunications
Growth Fund previously held by such shareholder. In addition, the
holding
period and tax basis of the
assets of the Telecommunications Growth Fund in the hands of the
Special
Equities Fund as a result of the
Reorganization will be the same as in the hands of the
Telecommunications
Growth Fund immediately prior
to the Reorganization.
Investment Objectives, Policies and Restrictions. The
Telecommunications
Growth Fund and the
Special Equities Fund have generally similar investment policies
and
restrictions. The Special Equities
Fund and the Telecommunications Growth Fund both seek long-term
capital
appreciation by investing
primarily in equity securities. However, the Telecommunications
Growth Fund is
classified as a non-
diversified investment company under the 1940 Act, which means
that the Fund
is not limited by the 1940
Act in the proportion of its assets that it may invest in the
obligations of a
single issuer. The
Telecommunications Growth Fund's assumption of large positions in
the
securities of a small number of
issuers may cause the Fund's share price to fluctuate to a greater
extent than
that of a diversified
investment company. The Special Equities Fund is classified as a
diversified
investment company.
Although both Funds seek long-term capital appreciation, the
Telecommunications Growth Fund
has income as a secondary objective, while the Special Equities
Fund does not
invest its assets with income
as a consideration. Common stocks which generate income in the
form of a
dividend may behave
differently during periods of varying market conditions than
common stocks
which do not pay a dividend.
Although the respective investment policies of the Special
Equities Fund and
the Telecommunications
Growth Fund are generally similar, shareholders of the
Telecommunications
Growth Fund should consider
certain differences in such objectives and policies. See
"Information About
the Special Equities Fund",
"Information About the Telecommunications Growth Fund" and
"Comparison of
Investment Objectives and
Policies."
Fees and Expenses. The Special Equities Fund pays SBMFM a monthly
investment
advisory fee
calculated at the rate of 0.55% of the Fund's average daily net
assets. The
Telecommunications Growth
Fund pays Strategy Advisers a monthly investment advisory fee
calculated at
the rate of 0.55% of the
Fund's average daily net assets, of which Strategy Advisers pays
to The Boston
Company Asset
Management, Inc. ("TBCAM"), the Fund's sub-advisor, a fee in the
amount of
0.275% of the Fund's
average daily net assets. In addition to the investment advisory
fees, both
Funds pay SBMFM an
administration fee payable monthly at the rate of 0.20% of the
respective
Fund's average daily net assets.
The expense ratio of the Special Equities Fund subsequent to the
Reorganization is expected to be
lower than that of the Telecommunications Growth Fund. See
"Reasons for the
Reorganization." Total
Special Equities Fund operating expenses stated as a percentage of
average net
assets for the fiscal year
ended December 31, 1995 for Class A, Class B and Class C shares
were 1.43%,
2.04% and 2.25%,
respectively. Total Telecommunications Growth Fund operating
expenses stated
as a percentage of
average net assets as of ended December 31, 1995 for Class A,
Class B and
Class C shares were 1.27%,
2.02% and 2.02%, respectively. As of June 30, 1996, total Special
Equities
Fund operating expenses were
1.15%, 1.94% and 1.95%, respectively for Class A, Class B and
Class C shares.
As of June 30, 1996,
total Telecommunications Growth Find operating expenses were
1.27%, 2.08% and
2.08%, respectively for
Class A, Class B and Class C shares. Prior to March 31, 1996, the
Special
Equities Fund had been
overaccruing for certain expenses. As of June 30, 1996, total
expenses of the
Special Equities Fund
decreased as a result of savings realized in custodian and
auditing fees and
expenses related to preparing
and mailing shareholder reports. Total Special Equities Fund
annual operating
expenses stated as a
percentage of average net assets subsequent to the Reorganization
(based upon
pro forma financial
information as of June 30, 1996) are expected to be 1.15%, 1.94%
and 1.95%,
for Class A, Class B and
Class C shares, respectively.
Class A, Class B and Class C shares of both the Special Equities
Fund and the
Telecommunications
Growth Fund are sold subject to distribution plans adopted
pursuant to Rule
12b-1 under the 1940 Act.
Under the plans applicable to each Fund, Smith Barney Inc.("Smith
Barney") is
paid a service fee
calculated at the annual rate of 0.25% of the value of each Fund's
average
daily net assets attributable to
the Fund's Class A, Class B and Class C shares. In addition, each
Fund's
Class B and Class C shares pay
a distribution fee primarily intended to compensate Smith Barney
for its
initial expense of paying financial
consultants a commission upon sales of the respective shares,
preparation of
sales literature, advertising
and printing and distributing prospectuses, statements of
additional
information and other materials. The
distribution fees for both Funds' Class B shares and Class C
shares are
calculated at the annual rate of
0.75% of the value of the respective Fund's average net assets
attributable to
the shares of the respective
class.
Purchase and Redemption Procedures. Purchase of shares of the
Special
Equities Fund and the
Telecommunications Growth Fund must be made : (i) through Smith
Barney; (ii)
by a broker that clears
securities transactions through Smith Barney on a fully disclosed
basis (an
"Introducing Broker"); or (iii)
by investment dealers in the selling group at their respective
public offering
prices (net asset value next
determined plus any applicable sales charge). Class A shares of
both the
Special Equities Fund and the
Telecommunications Growth Fund are sold subject to a maximum
initial sales
charge of 5.00% of the
public offering price. Class B and Class C shares of both Funds
are sold
without an initial sales charge but
are subject to certain higher ongoing expenses and a "CDSC"
payable upon
certain redemptions. In
addition, Class Y shares of both Funds are sold without an initial
sales
charge or CDSC, and are available
only to investors meeting an initial investment minimum of
$5,000,000. As of
the Record Date, no Class Y
shares of the Telecommunications Growth Fund were outstanding.
Further, the
Special Equities Fund
offers a fifth class of shares, Class Z shares, exclusively for
sale to tax-
exempt employee benefit and
retirement plans of Smith Barney. The Telecommunications Growth
Fund does not
offer Class Z shares.
Class A shares of both Funds may be redeemed at their next
determined net
asset value per share
without charge. Class B shares of both Funds may be redeemed at
their next
determined net asset value per
share, subject to a maximum CDSC of 5.00% of the lower of original
cost of the
shares or redemption
proceeds, declining by 1.00% each year after the date of purchase
to zero.
Class C shares of both Funds
may be redeemed at their net asset value per share, subject to a
CDSC of
1.00%, if such shares are
redeemed during the first 12 months following their purchase.
Shares of both
Funds held by Smith Barney
as custodian must be redeemed by submitting a written request to a
Smith
Barney Financial Consultant. All
other shares may be redeemed through a Financial Consultant,
Introducing
Broker or by forwarding an
appropriate written request for redemption to First Data Investor
Services
Group, Inc. ("FDISG") . See
"Redemption of Shares" in the accompanying Prospectus of the
Special Equities
Fund.
Exchange Privileges. The exchange privileges available to
shareholders of the
Special Equities Fund
are identical to those available to shareholders of the
Telecommunications
Growth Fund. Shareholders of
both the Telecommunications Growth Fund and the Special Equities
Fund may
exchange at net asset value
all or a portion of their shares for shares of the same class in
certain funds
of the Smith Barney Mutual
Funds. Any exchange will be a taxable event for which a
shareholder may have
to recognize a gain or a
loss under Federal income tax provisions. No initial sales
charge is imposed
on the shares being acquired,
and no CDSC is imposed on the shares being disposed of, through an
exchange.
However, a sales charge
differential may apply to exchanges of Class A shares of the
Funds. With
respect to Class B and Class C
shares of the Funds, the Class B and Class C shares acquired in
the exchange
will be deemed to have been
purchased on the same date as the Class B and Class C shares that
were
exchanged. In the event a Class B
shareholder wishes to exchange his or her shares for Class B
shares of a fund
with a higher CDSC, the
exchanged Class B shares will be subject to the higher applicable
CDSC.
Dividends. The policies regarding dividends and distributions are
generally
the same for both Funds.
Each Fund's policy is to declare and pay dividends of investment
income
annually and to make distributions
of any realized capital gains at least annually. Unless a
shareholder
otherwise instructs, dividends and
capital gains distributions will be reinvested automatically in
additional
shares of the same Class at net
asset value, subject to no sales charge or CDSC. The distribution
option
currently in effect for a
shareholder of the Telecommunications Growth Fund will remain in
effect after
the Reorganization. After
the Reorganization, however, the former Telecommunications Growth
Fund
shareholders may change their
distribution option at any time by contacting a Smith Barney
Financial
Consultant or FDISG in writing.
See "Dividends, Distributions and Taxes" in the accompanying
prospectus of the
Special Equities Fund.
Shareholder Voting Rights. The Special Equities Fund and the
Telecommunications Growth Fund are
both open-end investment companies. The Special Equities Fund is a
separate
series of the Investment
Funds, a Maryland corporation. The Telecommunications Growth Fund
is a
separate series of the Trust, a
Massachusetts business trust. As permitted by both Maryland and
Massachusetts
law, normally no
meeting of shareholders will be held for the purpose of electing
directors/trustees unless and until such time
as less than a majority of the directors/trustees holding office
have been
elected by shareholders. At that
time, the directors/trustees in each Fund then in office will call
a
shareholders' meeting for the election of
directors/trustees. Shareholders may, at any meeting called for
such purpose,
remove a director/trustee by
the affirmative vote of the holders of record of a majority of the
votes
entitled to be cast for the election of
directors/trustees. For purposes of voting on the Reorganization,
the Class
A, Class B and Class C shares
of the Telecommunications Growth Fund shall vote together as a
single class.
See "Comparative
Information on Shareholder's Rights-Voting Rights."
RISK FACTORS
The Telecommunications Growth Fund concentrates its assets in the
telecommunications industry
which includes companies engaged in competition for market share.
The
Telecommunications Growth
Fund is classified as an non-diversified investment company and,
as a result,
the assumption of large
positions in the securities of a small number of issuers may cause
the Fund's
share price to fluctuate to a
greater extent than that of other diversified investment
companies. The
Special Equities Fund invests
primarily in securities of secondary growth companies, generally
not within
the S&P 500. These
companies may still be in the developmental stage and may not have
reached a
fully mature stage of
earnings growth. Investing in smaller, newer issuers generally
involves
greater risk than investing in larger,
more established issuers.
Both the Special Equities Fund and the Telecommunications Growth
Fund invest
primarily in common
stocks. The risks typically associated with investing in common
stocks and
certain differences in the risks
associated with investing in the Funds, are discussed under the
caption
"Comparison of Investment
Objectives and Policies".
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Trust has determined that it is
advantageous to
combine the
Telecommunications Growth Fund with the Special Equities Fund
since the Funds
have generally similar
investment objectives and policies.
The Board of Trustees of the Trust has determined that the
Reorganization
should provide certain
benefits to Telecommunication Growth Fund shareholders. In making
such
determination, the Board of
Trustees considered, among other things: (i) the terms and
conditions of the
Reorganization; (ii) the savings
in expenses borne by shareholders expected to be realized by the
Reorganization; (iii) the fact that the
Funds have similar investment policies and the overlap of assets
of each Fund
invested in the same industry
sectors; (iv) the fact that the Reorganization will be effected as
a tax-free
reorganization; and (iv) the
comparative investment performance of the Funds.
In light of the foregoing, the Board of Trustees of the Trust, on
behalf of
the Telecommunications
Growth Fund, including the non-interested Trustees, have decided
that it is in
the best interests of the
Telecommunications Growth Fund and its shareholders to combine
with the
Special Equities Fund. The
Board of Trustees has also determined that a combination of the
Telecommunications Growth Fund and the
Special Equities Fund would not result in a dilution of the
Telecommunications
Growth Fund's
shareholders' interests.
The Board of Directors of the Investment Funds considered the
following
factors, among others, in
approving the Reorganization and determining that it is
advantageous to
acquire the assets of the
Telecommunications Growth Fund: (i) the terms and conditions of
the
Reorganization; (ii) the fact that the
Reorganization will be effected as a tax-free reorganization; and
(iii) the
fact that the acquisition of
significant assets would allow the Fund to be more efficiently
managed and
permit the portfolio manager to
increase the Special Equities Fund's position in certain stocks
and more
broadly diversify the Fund's
portfolio. Accordingly, the Board of Directors of the Investment
Funds,
including a majority of the non-
interested Directors, has determined that the Reorganization is in
the best
interests of the Special Equities
Fund's shareholders and that the interests of the Special Equities
Fund's and
Investment Fund's shareholders
and Investment Funds will not be diluted as a result of the
Reorganization.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following summary of the Plan is
qualified in its
entirety by reference to
the Plan (Exhibit A hereto). The Plan provides that the Special
Equities Fund
will acquire substantially all
of the assets of the Telecommunications Growth Fund in exchange
for shares of
the Special Equities Fund
and the assumption by the Special Equities Fund of certain
liabilities of the
Telecommunications Growth
Fund on September 20, 1996, or such later date as may be agreed
upon by the
parties (the "Closing Date").
Prior to the Closing Date, the Telecommunications Growth Fund
will endeavor
to discharge all of its
known liabilities and obligations. The Special Equities Fund will
not assume
any liabilities or obligations
of the Telecommunications Growth Fund other than those reflected
in an
unaudited statement of assets and
liabilities of the Telecommunications Growth Fund prepared as of
the close of
regular trading on the New
York Stock Exchange, Inc. (the "NYSE"), currently 4:00 p.m. New
York time, on
the Closing Date. The
number of full and fractional Class A, Class B and Class C shares
of the
Special Equities Fund to be
issued to the Telecommunications Growth Fund shareholders will be
determined
on the basis of the Special
Equities Fund's and the Telecommunications Growth Fund's relative
net asset
values for Class A, Class B
Class C shares, respectively, computed as of the close of regular
trading on
the NYSE on the Closing Date.
The net asset value per share of each Class will be determined by
dividing
assets, minus liabilities, by the
total number of outstanding shares.
Both the Telecommunications Growth Fund and the Special Equities
Fund will
utilize the procedures
set forth in the Prospectus of the Special Equities Fund to
determine the
value of their respective portfolio
securities. The method of valuation employed will be consistent
with Rule
22c-1 under the 1940 Act, and
with the interpretation of such rule by the SEC's Division of
Investment
Management.
At or prior to the Closing Date, the Telecommunications Growth
Fund will, and
the Special Equities
Fund may, declare a dividend or dividends which, together with all
previous
such dividends, shall have the
effect of distributing to their respective shareholders all
taxable income for
the taxable year ending on or
prior to the Closing Date (computed without regard to any
deduction for
dividends paid) and all of its net
capital gains realized in the taxable year ending on or prior to
the Closing
Date (after reductions for any
capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the
Telecommunications Growth Fund will
liquidate and distribute pro rata to shareholders of record as of
the close of
business on the Closing Date,
the full and fractional shares of the Special Equities Fund
received by the
Telecommunications Growth
Fund. Such liquidation and distribution will be accomplished by
the
establishment of accounts in the
names of the Telecommunications Growth Fund's shareholders on the
share
records of the Special Equities
Fund's shareholder servicing agent. Each account will represent
the
respective pro rata number of full and
fractional shares of the Special Equities Fund due to each of the
Telecommunications Growth Fund's
shareholders.
The consummation of the Reorganization is subject to the
conditions set forth
in the Plan.
Notwithstanding approval of the Telecommunications Growth Fund's
shareholders,
the Plan may be
amended as set forth in paragraph 12 of the Plan and may be
terminated at any
time at or prior to the
Closing Date by: (i) the mutual agreement of the Trust, on
behalf of the
Telecommunications Growth
Fund and the Investment Funds, on behalf of the Special Equities
Fund; (ii)
the Trust, in respect of the
Telecommunications Growth Fund, in the event that the Investment
Funds, in
respect of the Special
Equities Fund shall, or the Investment Funds, in respect of the
Special
Equities Fund, in the event that the
Trust or the Telecommunications Growth Fund shall, materially
breach any
representation, warranty or
agreement contained herein to be performed at or prior to the
Closing Date; or
(iii) a party if a condition
herein expressed to be precedent to the obligations of the
terminating party
has not been met and it
reasonably appears that it will not or cannot be met.
Approval of the Plan will require the affirmative vote of a
majority, as
defined in the 1940 Act, of the
outstanding shares of the Telecommunications Growth Fund, which is
the lesser
of: (i) 67% of the voting
securities of the Telecommunications Growth Fund present at the
Meeting, if
the holders of more than 50%
of the outstanding voting securities of the Telecommunications
Growth Fund are
present or represented by
proxy, or (ii) more than 50% of the outstanding shares of the
Telecommunications Growth Fund. If the
Reorganization is not approved by shareholders of the
Telecommunications
Growth Fund, the Board of
Trustees will consider other possible courses of action, including
liquidation
of the Telecommunications
Growth Fund.
Description of the Special Equities Fund's Shares. Full and
fractional shares
of the respective Classes
of shares of common stock of the Special Equities Fund will be
issued to the
Telecommunications Growth
Fund in accordance with the procedures detailed in the Plan and as
described
in the Special Equities Fund's
Prospectus. Generally, the Special Equities Fund does not issue
share
certificates to shareholders unless a
specific request is submitted to FDISG. The shares of the Special
Equities
Fund to be issued to the
Telecommunications Growth Fund shareholders and registered on the
shareholder
records of FDISG will
have no pre-preemptive rights.
Federal Income Tax Consequences. For Federal income tax purposes,
the
exchange of assets for
shares of the Special Equities Fund is intended to qualify as a
tax-free
reorganization under Section 368 (a)
of the Internal Revenue Code of 1986, as amended (the "Code"). As
a condition
to the closing of the
Reorganization, the Telecommunications Growth Fund will receive an
opinion
from Willkie Farr &
Gallagher, counsel to the Telecommunications Growth Fund and the
Special
Equities Fund, to the effect
that, on the basis of the existing provisions of the Code, U.S.
Treasury
regulations issued thereunder,
current administrative rules, pronouncements and court decisions,
for Federal
income tax purposes, upon
consummation of the Reorganization, the following will apply:
(1) the Reorganization will constitute a reorganization within
the meaning
of Section 368
(a)(1)(C) of the Code, and the Special Equities Fund and the
Telecommunications
Growth Fund are each a "party to a reorganization" within the
meaning of
Section
368(b) of the Code;
(2) no gain or loss will be recognized by either the Special
Equities Fund
or the
Telecommunications Growth Fund upon the transfer of the
Telecommunications
Growth Fund's assets to, and the assumption of the
Telecommunications Growth
Fund's liabilities by, the Special Equities Fund in exchange for
the Special
Equities
Fund's shares, or upon the distribution of the Special Equities
Fund's shares
to the
Telecommunications Growth Fund's shareholders in exchange for
their shares in
the
Telecommunications Growth Fund;
(3) no gain or loss will be recognized by shareholders of the
Telecommunications Growth
Fund upon the exchange of their shares for the Special Equities
Fund shares;
(4) the basis of the Special Equities Fund shares received by
each
Telecommunications
Growth Fund shareholder pursuant to the Reorganization will be the
same as the
basis of the Telecommunications Growth Fund shares surrendered in
exchange
therefor;
(5) the holding period of the Special Equities Fund shares to be
received by
each
Telecommunications Growth Fund shareholder will include the
holding period of
the
shares of the common stock of the Telecommunications Growth Fund
which are
surrendered in exchange therefor (provided the Telecommunications
Growth Fund
shares were held as capital assets on the date of the
Reorganization);
(6) the basis of the Telecommunications Growth Fund's assets
acquired by the
Special
Equities Fund will be the same as the basis of such assets to the
Telecommunications
Growth Fund immediately prior to the Reorganization; and
(7) the holding period of the assets of the Telecommunications
Growth Fund
acquired by
the Special Equities Fund will include the period for which such
assets were
held by
the Telecommunications Growth Fund.
Shareholders of the Telecommunications Growth Fund should consult
their tax
advisors regarding the
effect, if any, of the proposed Reorganization in light of their
individual
circumstances. Since the foregoing
discussion only relates to the Federal income tax consequences of
the
Reorganization, shareholders of the
Telecommunications Growth Fund should also consult their tax
advisors as to
state and local tax
consequences, if any, of the Reorganization.
Capitalization. The following table, which is unaudited, shows
the
capitalization of the Special
Equities Fund and the Telecommunications Growth Fund as of July
29, 1996 and
on a pro forma basis as
of that date, giving effect to the proposed acquisition of assets
at net asset
value:
(In thousands, except
per share values)
(Unaudited)
Telecommunications
Growth
Fund
Special
Equities
Fund
Pro forma
For
Reorganization
Class A
Net
Assets............................................................
.....
Net asset value per
share..........................................
Shares
outstanding.....................................................
$57,214
$12.52
4,570
$184,770
$28.15
6,565
$241,984
$28.15
8,597
Class B
Net
Assets............................................................
.....
Net asset value per
share..........................................
Shares
outstanding.....................................................
$110,847
$12.26
9,040
$257,297
$27.40
9,389
$368,144
$27.40
13,434
Class C
Net
Assets............................................................
.....
Net asset value per
share..........................................
Shares
outstanding.....................................................
$739
$12.46
59
$23,744
$27.41
866
$24,483
$28.19
1,652
Class Y
Net
Assets............................................................
....
Net asset value per
share...........................................
Shares
outstanding....................................................
Class Z
Net
Assets............................................................
....
Net asset value per
share..........................................
Shares
outstanding..................................................
$-0-
$-0-
- -0-
$-0-
$-0-
- -0-
$46,577
$28.19
1,652
$46,577
$28.19
1,652
As of the Record Date, July 29, 1996, there were 4,569,744
outstanding Class A
shares, 9,039,701
outstanding Class B shares, 59,332 outstanding Class C shares and
no
outstanding Class Y shares of the
Telecommunications Growth Fund and 6,564,783 outstanding Class A
shares,
9,389,189 outstanding Class
B
shares, 866,272 outstanding Class C shares, 1,652,010 outstanding
Class Y
shares and 359,747 Class Z
shares
of the Special Equities Fund. As of the Record Date, the officers
and
trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the
Telecommunications Growth Fund. To
the
best knowledge of the Trustees, as of the Record Date, no
shareholder or
"group" (as that term is used in
Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act")),
except as set forth in the table
below, owned beneficially or of record 5% or more of a class of
the
Telecommunications Growth Fund. As
of
the Record Date, the officers and Directors of the Investment
Funds as a group
beneficially owned less than
1%
of the outstanding shares of the Special Equities Fund. Except as
set forth in
the table below, to the best
knowledge of the Directors of the Investment Funds, as of the
Record Date, no
shareholder or "group" (as
that
term is used in Section 13(d) of the Exchange Act owned
beneficially or of
record more than 5% of a class
of
shares of the Special Equities Fund.
Percentage
of Class
Owned of
Record
or
Beneficially
Upon
Consummation
Name and Fund As of the of the
Address and Class Record Date
Reorganization
Myron Adler and Elaine Adler Telecommunications 6.35%
0.19%
910 Franklin Lake Road Growth, Class C
Franklin Lakes, NJ 07417
Ms. Lois V. Enslow Telecommuncations 6.35% 0.19%
25 Troy Drive Growth, Class C
Springfield, NJ 07081
Smith Barney Concert Series Inc. Special Equities 60.48%
60.48%
High Growth Portfolio Class Y
c\o PNC Bank
200 Stevens Drive, Suite 440
Lester, PA 19113
Smith Barney Concert Series Inc. Special Equities 39.52%
39.52%
Growth Portfolio Class Y
c\o PNC Bank
200 Stevens Drive, Suite 440
Lester, PA 19113
INFORMATION ABOUT THE SPECIAL EQUITIES FUND
Management's discussion and analysis of Market Condition and
Portfolio Review
(through December 31,
1995).
The year 1995 began slowly, rose to a loud crescendo, tapered off
a bit and
ended strongly. Coming
into 1995, analyst expectations about both the equity markets and
the economy
were less than spectacular.
Many investment professionals had expected a difficult year of the
stock
market. Yet what unfolded in
1995 has to be considered one of the "great" years of the markets,
much like a
classic "great" wine.
In the early part of the year, when investor concerns about
economic growth,
inflation concerns
subsided, the equity markets were essentially calm. Then, as the
economy
slowed down, interest rates
declined and inflation concerns subsided, the markets began to hit
new highs
with such frequency it soon
became the norm. All of the major stock market indices
participated: The Dow
Jones Industrial Average
and the Standard & Poor's 500-Stock Price Index finished the year
up 36.94%
and 37.53%, respectively.
The NASDAQ Composite Index and the Russell 2000 Index rose 39.92%
and 28.45%,
respectively.
The stock market rally, led by a huge concentration of investors
in technology
stocks, began to falter in
August with the announcement of a slight disappointment in
earnings from
Intel. This earnings report from
Intel raised a red flag to investors about other technology stocks
which began
a sharp decline from their
highs. This sell-off in technology stocks affected the markets,
especially the
universe of small-capitalization
stocks. Small-capitalization stocks underperformed large-
capitalization
stocks over the full year. Then, in
mid-December, technology stocks rebounded, causing a strong finish
for all the
major stock market
averages. Because Smith Barney Special Equities invests in small,
emerging
growth companies, its
holdings are generally not affected by broad economic and market
conditions.
For the one-year period
ended December 31, 1995, Smith Barney Special Equities Fund posted
a
cumulative total return (which
excludes the effects of all sales charges) of 63.48% for Class A
shares.
Fund's Investment Strategy
In the past year, Smith Barney Special Equities Fund continued to
buy stocks
of companies with strong
fundamentals and above-average growth prospects with the intention
of holding
them. Management does
not focus on short-term price fluctuations as long as the Fund
believes a
company's fundamentals remain
viable and growth can be sustained over a full market cycle. At
year end, the
Fund's top-five holdings
were:
Ascend Communications Inc.
Macromedia Inc.
Baby Superstore Inc.
Starbucks Corp.
Callaway Golf Co.
For 1996, management we expects the early part of the year to be
challenging
for small-capitalization
stocks. However, management believes the relative performance of
small-
capitalization stocks may
improve as the year progresses.
Management's Update (through June 30, 1996).
Market and Economic Overview
The first six months of 1996 was characterized by a choppy market,
peaking in
February and essentially
trading sideways through June. As we entered 1996, the outlook
from many
investment professionals was
less-than-enthusiastic after the equity market's stellar
performance in 1995.
For the most part, investors
focused constantly on changing perceptions of economic growth,
fear of
accelerated inflation and rising
interest rates. Consequently, as long bond yields rose above the
psychological 7% level in May, growth
stocks, and small-caps in particular, reacted somewhat negatively
as investors
became skittish.
In the first few weeks of the year, the equity markets weakened on
heightened
concerns over inflationary
growth. The market quickly rebounded, setting record highs in
most major
indices, as investor sentiment
improved on stronger-than-expected corporate profit growth. The
markets
continued to rally in the second
quarter, despite some signs of inflation as evidenced by strong
increases in
newly created jobs and higher
levels of consumer spending, and the subsequent rise in long bond
yields. The
rally slowed in mid-May as
a less bullish outlook unfolded, due, in part, to some key
reported earnings
of weaker-than-expected
proportions coupled with fears of a Federal Reserve interest rate
hike.
Despite this, major stock market
averages managed to register reasonable gains. The Dow Jones
Industrial
Average and the Standard &
Poor's 500-Stock Price Index finished the first half of 1996 up
10.50% and
10.09%, respectively. The
NASDAQ Composite Index and the Russell 2000 Index rose 12.63% and
10.36%,
respectively.
Both retail and technology stocks began to falter in May as retail
sales
softened owing to a slowing
economy and semiconductor chip pricing and order rates continued
to weaken.
The sell-off in technology
stocks negatively impacted the markets, especially, the small-
capitalization
stock universe, as a "classic"
summer slowdown took hold. Small-capitalization stocks have
underperformed
large-capitalization stocks
for the better part of the first half of 1996. Management expects
as the year
progresses to see a better
relative performance from small cap stocks than we have seen so
far this year.
Fund's Performance and Investment Strategy
Because the Smith Barney Special Equities Fund invests in small,
emerging
growth companies, its holdings
are generally not affected by broad economic and market
conditions. However,
the Fund slightly
underperformed relative to market indicies due to its high
concentration in
technology stocks, which
declined sharply between May and June in response to a slowing in
overall
personal computer sales,
declining product prices and softening earnings.
Despite the recent volatility in the small and mid-cap markets the
Special
Equities Fund's strategy
continues to be based on a long-term perspective. Management does
not focus
on short-term price
fluctuations as long as the Fund believes the company's
fundamentals and
growth can remain in tact.
Management believes that the small-cap universe offers the
greatest potential
return to long-term investors
over a full market cycle. In that regard, we remain committed to
owning high
quality stocks capable of
delivering reasonably stable, well-above average growth over a
multi-year
period. After the first six
months of 1996, the Special Equities Fund's top-five holdings
were:
Starbucks Corp., a specialty coffee roaster and retailer
Callaway Golf Company, a high-quality golf club designer and
manufacturer
Shiva Corp., a computer hardware and software manufacturer
Boston Chicken, a retail food franchise specializing in
homestyle meals
Ascend Communications, a company that develops network access
products
Outlook
For the balance of the year, management expects some choppiness in
small-
capitalization stocks, reflecting
a continued focus on earnings. However, we remain optimistic
about the
prospects for continued strength
in small-cap stocks over the next several years. Although recent
select data
suggests that the U.S. economy
is growing at a rapid pace, we believe that growth has moderated,
interest
rates are likely to decline over
the next couple of years, and inflation has been contained. Given
these
factors, management believes
earnings growth for large-capitalization companies to slow, and
earnings
growth for small-cap companies
should, on a relative basis, outperform gains registered by larger
companies.
Management. George V. Novello, a Managing Director of Smith Barney
is an
Investment Officer of
the Special Equities Fund. Mr. Novello has managed the day to day
operations
of the Special Equities
Fund, including making all investment decisions, since September,
1990.
SMITH BARNEY SPECIAL EQUITIES FUND
Historical Performance - Class A Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$19.10
$30.44
$0.00
$0.76
$0.00
63.48%
12/31/94
20.23
19.10
0.00
0.00
0.00
(5.59)
12/31/93
15.47
20.23
0.00
0.33
0.00
32.90
Inception* - 12/31/92
14.13
15.47
0.00
0.00
0.00
9.48+
Total
$0.00
$1.09
$0.00
Historical Performance - Class B Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$18.82
$29.76
$0.00
$0.76
$0.00
62.30%
12/31/94
20.08
18.82
0.00
0.00
0.00
(6.27)
12/31/93
15.47
20.08
0.00
0.33
0.00
31.93
12/31/92
14.18
15.47
0.00
0.00
0.00
9.10
12/31/91
9.82
14.18
0.00
0.00
0.03
44.76
12/31/90
13.77
9.82
0.29
0.23
0.02
(24.71)
12/31/89
12.04
13.77
0.27
0.00
0.24
18.60
12/31/88
11.48
12.04
0.55
0.30
0.00
12.60
12/31/87
13.02
11.48
0.00
0.14
0.00
(10.91)
12/31/86
13.15
13.02
0.05
1.00
0.00
7.05
Total
$1.16
$2.76
$0.29
Historical Performance - Class C Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$18.82
$29.77
$0.00
$0.76
$0.00
62.35%
12/31/94
20.08
18.82
0.00
0.00
0.00
(6.27)
Inception* - 12/31/93
22.62
20.08
0.00
0.33
0.00
(9.77)+
Total
$0.00
$1.09
$0.00
SMITH BARNEY SPECIAL EQUITIES FUND
Average Annual Return
Without Sales Charge(1)
Class A
Class B
Class C
Year Ended 12/31/95
63.48%
62.30%
62.35%
Five Years Ended 12/31/95
N/A
25.95
N/A
Ten Years Ended 12/31/95
N/A
11.76
N/A
Inception* through 12/31/95
29.39
11.98
15.48
With Sales Charge(2)
Class A
Class B
Class C
Year Ended 12/31/95
55.31%
57.30%
61.35%
Five Years Ended 12/31/95
N/A
25.87
N/A
Ten Years Ended 12/31/95
N/A
11.76
N/A
Inception* through 12/31/95
27.30
11.98
15.48
Cumulative Total Return
Without Sales Charge(1)
Class A (Inception* through 12/31/95)
124.59%
Class B (12/31/85 through 12/31/95)
203.96
Class C (Inception* through 12/31/95)
37.29
(1) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value and
does
not reflect
deduction of the applicable sales charge with respect to Class A
shares or the
applicable contingent
deferred sales
charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value. In
addition, Class
A shares reflect the deduction of the maximum initial sales charge
of 5.00%;
Class B shares reflect the
deduction
of a
5.00% CDSC, which applies if shares are redeemed less than one
year from
initial purchase and declines
thereafter
by 1.00% per year until no CDSC is incurred. Class C shares
reflect the
deduction of a 1.00% CDSC,
which
applies
if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are
November 6, 1992,
December 13, 1982
and
October 18, 1993,
respectively.
++Total return is not annualized, as it may not be
representative of
the total return for the
year.
SMITH BARNEY SPECIAL EQUITIES FUND
Historical Performance (unaudited)
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Special Equities Fund vs.
Standard & Poor's 500 Index+
December 1985 - December 1995
+Hypothetical illustration of $10,000 invested in Class B
shares on
December 31, 1985, assuming
reinvestment of
dividends and capital gains, if any, at net asset value through
December 31,
1995. The Standard & Poor's
500
Index is
composed of widely held common stocks listed on the New York Stock
Exchange,
American Stock
Exchange and
the over-
the-counter market. Figures for the index include reinvestment of
dividends..
The index is unmanaged and
is not
subject
to the same management and trading expenses as a mutual fund. The
performance
of the Fund's other
classes may
be
greater or less than the Class B shares' performance indicated on
this chart,
depending on whether greater
or lesser
sales
charges and fees were incurred by shareholders investing in the
other classes.
All figures represent past performance and are not a
guarantee of future
results. Investment
returns and
principal
value will fluctuate, and redemption value may be more or less
than the
original cost. No adjustment has
been
made for
shareholder tax liability on dividends or capital gains.
INFORMATION ABOUT THE TELECOMMUNICATIONS GROWTH FUND
Management's discussion and analysis of Market Condition and
Portfolio Review
(through
December 31, 1995).
As you know, the investment management team of Smith Barney
Telecommunications
Growth Fund
seeks to provide shareholders with capital growth through common
stocks and,
secondarily, income. The
Fund's 1995 annual total return for Class A and Class B shares was
8.54% and
7,67%, respectively. In
comparison, the Standard & Poor's 500-Stock Price Index (the "S&P
500," a
capitalization-weighted
measure of 500 widely held common stocks listed on the New York
Stock
Exchange, American Stock
Exchange and over-the-counter market) has a total return of 37.53%
in 1995.
The Fund's performance in 1995 was disappointing as its stocks in
our primary
area of investment
lagged the performance of the U.S. market in general. We have
attempted to
position the portfolio to
benefit from technological change and rapid growth that is
occurring in the
telecommunications industry
worldwide. Last year, foreign markets were either flat or down
and the
domestic market was affected by
anxiety caused by pending legislative and regulatory activity in
Washington,
D.C.
The telecommunications industry is undergoing unprecedented
change. Major
capital spending plans to
enable telephones to provide video, the wireless revolution and
the explosive
growth of the Internet are just
some of the many factors that have positively impacted the
telecommunications
sector. On the other hand,
fears of entry barriers coming down and the acceleration of
capital investment
requirements have
heightened investor concerns.
Our long-term outlook for the telecommunications industry is
positive. A
global revolution in
communications is underway and technological advances are fueling
its growth.
In order to capitalize on
this long-term trend, the Fund intends to target companies that
are directly
involved in growth areas such as
software, networking, on-line services and enhancing the power of
computers.
Management's Update (through June 30, 1996).
Market and Performance Update
The main investment objectives of the Telecommunications
Growth Fund are
to provide
shareholders with capital growth, and secondarily, to provide
income
opportunities in the
telecommunications industry through a diversified portfolio. The
Fund broadly
defines the
"telecommunications industry" to include not only traditional
telecommunications companies, but also
broadcasting companies, publishers and computer equipment and
software
companies. During the past six
months, the stocks of telephone companies underperformed,
retreating from
record highs in January.
Stocks of many telephone companies declined as uncertainty arose
over proposed
telecommunications
legislation. The proposed bill would allow local telephone
companies to offer
long distance service outside
of their regions, and thus increase future earnings potential.
Much of the
capital growth in the Fund can be
attributed to our investments in the technology sector, which
performed well,
especially during the second
quarter. Internet and Intranet-related stocks, which account for
over 10% of
the Fund, were particularly
strong. The total six-month return for the Telecommunications
Growth Fund was
8.50%, and
underperformed versus the 10.09% gain in the Standard and Poor's
500 Stock
Index ("S&P 500"). (The
S&P 500 is an unmanaged capitalization-weighted index of 500
widely held
stocks and is a common stock
benchmark.) During the period covered by this report, the
Telecommunications
Growth Fund continued to
focus on stocks of companies within the telecommunications
industry that are
directly involved in areas
such as software, networking and on-line services that we believe
have
excellent growth potential. Stocks
such as Microsoft, MFS Communication and Tellabs Inc., which are
some of the
Fund's top holdings, are
examples of such companies. Because of their technological
prowess, we
believe these companies have the
potential to deliver higher future earnings growth and provide
competitive
returns to investors over the long
term.
Management. Guy Scott, Senior Vice President of the TBCAM, has
served as
portfolio manager of the
Fund since October, 1991 and manages the day to day operations of
the Fund
including making all
investment decisions.
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
Average Annual Total Return
Without Sales Charge(1)
Class A
Class B
Class C
Year Ended 12/31/95
8.54%
7.67%
7.73%
Five Years Ended 12/31/95
14.70
N/A
N/A
Ten Years Ended 12/31/95
12.32
N/A
N/A
Inception* through 12/31/95
14.17
13.50
1.81
With Sales Charge(2)
Class A
Class B
Class C
Year Ended
3.11%
2.67%
6.73%
Five Years Ended 12/31/95
13.53
N/A
N/A
Ten Years Ended 12/31/95
11.74
N/A
N/A
Inception* through 12/31/95
13.68
13.02
1.81
Cumulative Total Return
Without Sales Charge(1)
Class A (12/31/85 through 12/31/95)
219.53%
Class B (Inception* through 12/31/95)
49.04
Class C (Inception* through 12/31/95)
2.08
(1) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value and
does
not reflect
deduction of the applicable sales charge with respect to Class A
shares or the
applicable contingent
deferred sales
charges
("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value. In
addition, Class A shares
reflect the deduction of the maximum initial sales charge of
5.00%; Class B
shares reflect the deduction of
a 5.00%
CDSC,
which applies if shares are redeemed less than one year from
initial purchase
and declines thereafter by
1.00% per
year until
no CDSC is incurred. Class C shares reflect the deduction of a
1.00% CDSC,
which applies if shares are
redeemed
within the
first year of purchase.
* Inception dates for Class A, B, C and shares are January 1,
1984,
November 6, 1992 and
November 7,
1994, respectively.
+Total return is not annualized, as it may not be
representative of the
total return for the year.
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
Historical Performance - Class A Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$11.91
$12.71
$0.00
$0.21
$0.00
$8.54%
12/31/94
12.86
11.91
0.13
0.00
0.00
(6.37)
12/31/93
9.63
12.86
0.00
0.17
0.00
35.27
12/31/92
8.68
9.63
0.02
0.71
0.00
19.41
12/31/91
7.36
8.68
0.06
0.14
0.01
20.94
12/31/90
8.78
7.36
0.14
0.10
0.00
(13.46)
12/31/89
7.08
8.78
0.16
0.82
0.00
37.85
12/31/88
6.10
7.08
0.10
0.00
0.00
17.69
12/31/87
11.05
6.10
0.69
3.96
0.00
(3.53)
12/31/86
12.64
11.05
0.32
3.39
0.00
18.84
Total
$1.62
$9.50
$0.01
Historical Performance - Class B Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$11.82
$12.51
$0.00
$0.21
$0.00
7.67%
12/31/94
12.77
11.82
0.03
0.00
0.00
(7.17)
12/31/93
9.63
12.77
0.00
0.17
0.00
34.34
Inception* - 12/31/92
9.33
9.63
0.01
0.71
0.00
10.98+
Total
$0.04
$1.09
$0.00
Historical Performance - Class C Shares
Net Asset Value
Beginning End
Income
Capital Gain
Return
Total
Year Ended
of Year of Year
Dividends
Distributions
of Capital
Returns(1)
12/31/95
$12.00
$12.71
$0.00
$0.21
$0.00
7.73%
Inception* - 12/31/94
12.70
12.00
0.03
0.00
0.00
(5.24)+
Total
$0.03
$0.21
$0.00
It is the Fund's policy to distribute dividends and capital gains,
if any,
annually.
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
Historical Performance (unaudited)
Growth of $10,000 Invested in Class A Shares of the
Smith Barney Telecommunications Fund vs.
Standard & Poor's 500 Index, Lipper Science & Technology Fund
Average
and Lipper Growth Fund Index+
December 1985 - December 1995
+ Hypothetical illustration of $10,000 invested in Class A
shares on
December 31, 1985, assuming
deduction of the
maximum 5.00% sales charge at the time of investment and
reinvestment of
dividends and capital gains, if
any, at
net asset value
through December 31, 1995. The Standard & Poor's 500 Index is
composed of
widely held common stocks
listed
on the New
York Stock Exchange, American Stock Exchange and the over-the-
counter market.
Figures for the index
include
reinvestment of
dividends. The Lipper Science & Technology Fund Average is
composed of the
Fund's peer group of 37
mutual
funds investing
within the science and technology investment objective category as
of December
31, 1995. The Lipper
Growth
Fund Index is a
net asset value weighted index of the 30 largest funds within the
Growth
category. The index is unmanaged
and is
not subject to
the same management and trading expenses as a mutual fund. The
performance of
the Fund's other classes
may be
greater or less
than the Class A shares' performance indicated on this chart,
depending on
whether greater or lesser sales
charges
and fees were
incurred by shareholders investing in other classes.
All figures represent past performance and are not a
guarantee of future
results. Investment
returns and
principal value
will fluctuate, and redemption value may be more or less than the
original
cost. No adjustment has been
made for
shareholder tax
liability on dividends or capital gains.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion which compares investment objectives,
policies and
restrictions of the Special
Equities Fund to the Telecommunications Growth Fund is based upon
and
qualified in its entirety by the
investment objectives, policies and restriction section of the
Prospectuses of
the Special Equities Fund and
the Telecommunications Growth Fund. For a full discussion of the
investment
objectives, policies and
restrictions of the Special Equities Fund, refer to the Special
Equities
Fund's Prospectus, which
accompanies this Prospectus/Proxy Statement, under the captions,
"Investment
Objectives and
Management Policies" and for a discussion of these issues as they
apply to
the Telecommunications
Growth Fund, refer to the Telecommunications Growth Fund's
Prospectus under
the caption, "Investment
Objectives and Management Policies."
Investment Objective. The investment objective of the
Telecommunications
Growth Fund is capital
appreciation, with income as a secondary consideration. The
investment
objective of the Special Equities
Fund is also long-term capital appreciation. Both the Special
Equities Fund's
and the Telecommunications
Growth Fund's investment objective is fundamental and, as such,
may be changed
only by the "vote of a
majority of the outstanding voting securities," as defined in the
1940 Act.
The investment policies of the
Special Equities Fund and the Telecommunications Growth Fund are
non-
fundamental and, as such, may
be changed by the Board of Directors/Trustees, without shareholder
approval,
provided such change is not
prohibited by the investment restrictions (which are set forth in
the
applicable Statement of Additional
Information) or applicable law, and any such change will first be
disclosed in
the then current prospectus.
Primary Investments. Both the Special Equities Fund and the
Telecommunications Growth Fund
invest primarily in equity securities (common stock and preferred
stock). The
Telecommunications Growth
Fund seeks to achieve its investment objective primarily through
investments
in common stocks and other
securities of companies engaged in the telecommunications
industry. The
Telecommunications Growth
Fund broadly defines the telecommunications industry as including
companies
engaged in the
communication, display, reproduction, storage and retrieval of
information,
and includes companies
involved in communications equipment, electronic components,
broadcasting,
computer equipment, cellular
communications and publishing. The Special Equities Fund invests
primarily in
equity securities which
SBMFM believes to have superior appreciation potential, which
often include
the common stock of
secondary growth companies, generally companies not within the S&P
500.
Although the Special Equities
Fund does not seek to achieve its objective by investing primarily
in
telecommunications companies, many
of the companies in which the Special Equities Fund invests are in
the
telecommunications industry as
defined by the Telecommunications Growth Fund. As of March 31,
1996,
approximately 35% - 40% of
the Telecommunications Growth Fund's portfolio was invested in
industries in
which the Special Equities
Fund was also invested.
The Telecommunications Growth Fund invests primarily in common
stock, but it
may also invest in
other types of securities, including convertible bonds,
convertible preferred
stocks, warrants, preferred
stocks and debt securities. The Telecommunications Growth Fund
may also, for
defensive purposes, invest
less than 65% of its assets in the telecommunications industry.
The Telecommunications Growth Fund is a non-diversified investment
company
under the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the
proportion of
its assets that it may invest in
the obligations of a single issuer. There may be additional risks
associated
with a non-diversified
investment company. (See, "Risk Factors"). The
Telecommunications Growth
Fund conducts its
operations, however, so as to qualify as a "regulated investment
company" for
purposes of the Code. To so
qualify, the Fund will limit its investments so that, at the close
of each
quarter of the taxable year, (a) not
more than 25% of the market value of the Fund's total assets will
be invested
in the securities of a single
issuer and (b) with respect to 50% of the market value of its
total assets,
not more than 5% of the assets
will be invested in the securities of a single issuer and the Fund
will not
own more than 10% of the
outstanding voting securities of a single issuer.
Additional Investments. Each Fund has the ability to engage in a
number of
specialized investment
strategies and techniques designed to enable the Fund to achieve
its
investment objectives, certain of which
are discussed below.
Repurchase Agreements. Each Fund may engage in repurchase
agreement
transactions (typically the
acquisition of 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
buyer to resell,
the obligation at an agreed-upon
price and time) with certain member banks of the Federal Reserve
System and
with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. The
value of
the underlying securities will
be at least equal at all times to the total amount of the
repurchase
obligation, including interest. SBMFM,
Strategy Advisers or TBCAM, as the case may be, acting under the
supervision
of the Board of
Directors/Trustees, reviews on an ongoing basis the value of the
collateral
and creditworthiness of those
banks and dealers with which the Funds enter into repurchase
agreements to
evaluate potential risks.
Foreign Securities and American Depository Receipts. The
Telecommunications
Growth Fund may
invest up to 10% of its net assets in the securities of foreign
issuers. Both
Funds may invest in American
Depository Receipts ("ADRs") which are U.S. dollar-denominated
receipts issued
generally by domestic
banks, representing the deposit with the bank of a security of a
foreign
issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States.
Lending Portfolio Securities. Each Fund is authorized to lend its
portfolio
securities to brokers,
dealers and other financial institutions. The Funds' loans of
securities will
be collateralized by cash or
U.S. government securities which are maintained in a segregated
account in an
amount at least equal to the
current market value of the loaned securities. The risks
associated with
lending portfolio securities, as with
other extensions of credit, consists of possible loss of rights in
the
collateral should the borrower fail
financially.
Short Sales Against the Box. Each Fund may sell securities short
if at all
times when a position is
open, the Fund owns the stock or owns securities convertible or
exchangeable
for securities of the same
issue as the securities sold short. Short sales of this kind are
referred to
as "against the box".
Options Activities. The Telecommunications Growth Fund may write
covered call
options and
purchase call options for the purpose of terminating its
outstanding
obligations with respect to securities
upon which call option contracts have been written. A call is
covered if the
Fund (a) owns the optioned
securities, (b) maintains in a segregated account with its
custodian, cash,
cash equivalents or U.S.
government securities with a value sufficient to meet the Fund's
obligations
under the call, or (c) owns an
offsetting call option. The Telecommunications Growth Fund will
write covered
call options on securities
to attempt to realize, through the receipt of premiums, a greater
return than
would be realized on the
securities alone. The Telecommunications Growth Fund will not
write option
contracts on its securities in
excess of 20% of the value of its net assets at the time such
options are
written.
Restricted and Illiquid Securities. Each Fund may purchase
securities subject
to restrictions on
disposition under the Securities Act of 1933 ("restricted
securities") and
securities for which there are no
readily available market quotations. Each Fund may be forced to
sell these
securities at less than fair
market value or may not be able to sell them when the investment
adviser
believes it desirable to do so.
Investment Restrictions. Each Fund has adopted the following
investment
restrictions for the
protection of shareholders. Each of the following restrictions,
with respect
to the Special Equities Fund,
and restrictions 1,2,6,7,9,12 and 14, with respect to the
Telecommunications
Growth Fund, are
fundamental and may not be changed without the approval of the
holders of a
majority, as defined in the
1940 Act, of the voting securities of the Fund.
1. The Special Equities Fund may not purchase the securities of
any one
issuer, other
than the U.S. government or its agencies or instrumentalities, if
immediately
after
such purchase more than 5% of the value of the total assets of the
Fund would
be
invested in securities of such issuer. As discussed above, this
same
limitation applies
to the Telecommunications Growth Fund only as to 50% of the market
value of
its
total assets.
2. Each Fund is prohibited from investing in securities of
issuers
conducting their
business activities in the same industry, except that, for the
Special
Equities Fund, (a)
the Fund maintains an investment policy which provides that
neither utilities
companies, as a group, nor all banks, savings and loan
associations and
savings
banks, as a group, will be considered a single industry, and (b)
there is no
such
limitation with respect to repurchase agreements, and for the
Telecommunications
Growth Fund, this restriction shall not apply to issuers in the
telecommunications
industry as determined by Strategy Advisers.
3. Each Fund is prohibited from investing in real estate, real
estate
mortgages, oil, gas
or mineral exploration or development programs, commodities or
commodities
contracts, except that the Telecommunications Growth Funds may (a)
invest in
companies engaged in the real estate business and securities which
are secured
by real
estate and (b) trade in futures contracts and options on futures
contracts,
and the
Special Equities Fund may purchase securities of companies,
including real
estate
investment trusts, which invest in real estate.
4. Each Fund is prohibited from purchasing the securities of
any other
investment
company, except in connection with a merger, consolidation,
reorganization, or
acquisition of assets.
5. Each Fund is prohibited from purchasing securities of
companies for the
purpose of
exercising control.
6. The Special Equities Fund may not participate on a joint or
a joint and
several basis
in any trading account in securities, except that the "bunching"
of orders of
two or
more funds or the Fund and other accounts for the sale or purchase
of
portfolio
securities shall not be considered participation in a joint
securities trading
account.
7. Each Fund is prohibited from purchasing more than 10% of the
outstanding
voting
securities of any one issuer, except that, with respect to the
Telecommunications
Growth Fund, this restriction shall only apply to 50% of the
Fund's total
assets.
8. Each Fund is prohibited from purchasing securities on margin
or selling
any
securities short (except "against the box").
9. Each Fund is prohibited from making loans, except for the
purchase of
debt
obligations, repurchase agreements, and loans of portfolio
securities.
10. Each Fund is prohibited from investing more than 5% of its
assets in
securities of
issuers which have been in operation for less than three years.
11. Each Fund is prohibited from purchasing the securities of
an issuer if
one or more of
the Directors/Trustees or officers of the Fund individually own
beneficially
more
than 1/2 of 1% of the outstanding securities of such issuer or
together own
beneficially more than 5% of such securities.
12. The Telecommunications Growth Fund is prohibited from
borrowing money,
except
that the Fund may borrow from banks for temporary or emergency
(not
leveraging)
purposes, including the meeting of redemption requests which might
otherwise
require
the untimely disposition of securities in an amount not exceeding
10% of the
Telecommunications Growth Fund's assets. Whenever borrowings
exceed 5% of the
value of the Telecommunications Growth Fund's assets, the Fund
will not make
additional investments. The Special Equities Fund is prohibited
from
borrowing
money, except from banks as a temporary measure for extraordinary
or emergency
purposes in an amount not exceeding 5% of the Fund's total assets.
This
restriction
shall not prohibit the Special Equities Fund from entering into
reverse
repurchase
agreements, provided that the Fund may not enter into a reverse
repurchase
agreement if, as a result, its current obligations under such
agreements would
exceed
one-third the current market value of the Fund's total assets.
13. Each Fund is prohibited from investing in puts, calls,
straddles,
spreads or any
combination thereof, except that the Telecommunications Growth
Fund may write
covered call options.
14. Each Fund is prohibited from acting as an underwriter of
securities.
15. Each Fund is prohibited from pledging, hypothecating,
mortgaging or
otherwise
encumbering its assets, except that the Telecommunications Growth
Fund may
encumber its assets in an amount up to 10% of the value of its
total assets to
secure
borrowings for temporary or emergency purposes.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
General. The Telecommunications Growth Fund and the Special
Equities Fund are
open-end,
management investment companies registered under the 1940 Act,
which
continuously offer to sell shares
at their current net asset value. The Telecommunications Growth
Fund is a
series of the Trust, which was
organized on June 2, 1983 under the laws of Massachusetts and is a
business
entity commonly referred to
as a "Massachusetts business trust". The Trust is governed by its
Master
Trust Agreement, by-laws and
Trustees. The Special Equities Fund is a series of the
Investment Funds,
which is a Maryland corporation,
incorporated on September 29, 1981 and is governed by its Articles
of
Incorporation, By-Laws and Board
of Directors. Each Fund is also governed by applicable state and
Federal law.
The beneficial interest in
the Telecommunication Growth Fund is divided into shares, all with
a par value
of $0.001 per share. The
number of authorized shares that may be issued by the Trust is
unlimited. The
Investment Funds has an
authorized capital of 10,000,000,000 shares of common stock with a
par value
of $.001 per share. The
Board of Directors has authorized the issuance of five series of
shares, each
representing shares in one of
five separate portfolios, and may authorize the issuance of
additional series
of shares in the future. The
assets of each portfolio are segregated and separately managed and
a
shareholder's interest is in the assets
of the portfolio in which he or she holds shares. In both the
Telecommunications Growth Fund and the
Special Equities Fund, Class A, Class B and Class C shares
represent interests
in the assets of the Fund
and have identical voting, dividend, liquidation, and other rights
on the same
terms and conditions except
that expenses related to the distribution of each class of shares
are borne
solely by the respective class and
each class of shares has exclusive voting rights with respect to
provisions of
the respective Fund's Rule
12b-1 distribution plan which pertains to a particular class.
Notwithstanding
the foregoing, Class B shares
of either Fund will convert automatically to Class A shares of
such Fund,
based on relative net asset value,
eight years after the date of the original purchase of such
shares. 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 will be
converted to Class A shares
of the respective Fund at that time.
Trustees/Directors. The Master Trust Agreement of the Trust
provides that the
term of office of each
Trustee shall be from the time of his or her election until the
termination of
the Trust or until such
Trustee's death, resignation or removal. The By-laws of the
Investment Funds
provide that the term of
office of each Director of the Investment Funds shall be from the
time of his
or her election and
qualification until his or her successor shall have been elected
and shall
have qualified. Trustees of the
Trust may be removed with or without cause at any time (i) by
written
instrument, signed by at least two-
thirds of the number of Trustees prior to such removal, (ii) by
vote of
shareholders of the Trust holding not
less than two-thirds of the shares of the Trust outstanding at any
meeting
called for the purpose or (iii) by a
written declaration signed by shareholders holding not less than
two-thirds of
the shares then outstanding
and filed with the Trust's custodian. Vacancies on the Boards of
either the
Trust or the Investment Funds
may be filled by the Trustees or Directors, as the case may be,
remaining in
office. A meeting of
shareholders will be required for the purpose of electing
additional Trustees
or Directors whenever fewer
than a majority of the Trustees or Directors then in office were
elected by
shareholders.
Voting Rights. Neither the Trust nor the Investment Funds holds a
meeting of
shareholders annually,
and there normally is no meeting of shareholders held for the
purpose of
electing trustees/directors unless
and until such time as less than a majority of the directors
holding office
have been elected by shareholders.
A meeting of shareholders of the Investment Funds, for any
purpose, must be
called upon the written
request of shareholders holding at least 25% of the outstanding
shares
entitled to vote at such meeting. On
each matter submitted to a vote of the shareholders of either the
Trust or the
Investment Funds, each
shareholder is entitled to one vote for each whole share owned and
a
proportionate, fractional vote for each
fractional share outstanding in the shareholder's name on the
respective
Fund's books. The affirmative
vote of the majority of votes validly cast in person or by proxy
at a
shareholder meeting at which a quorum
is present, shall decide any questions except when a different
vote is
required or permitted by any provision
of the 1940 Act or other applicable law or as may otherwise be set
forth in
the applicable organizational
documents, or in cases where the vote is submitted to the holders
of one or
more but not all portfolios or
classes, a majority of the votes cast of the particular portfolio
or class
affected by the matter shall decide
such matter.
Liquidation or Dissolution. In the event of the liquidation or
dissolution of
the Special Equities Fund
or the Telecommunications Growth Fund, the shareholders of the
Funds are
entitled to receive, when, and
as declared by the Directors or the Trustees, the excess of the
assets
belonging to the Funds over the
liabilities belonging to the Funds. In either case, the assets so
distributed
to shareholders of the Funds will
be distributed among the shareholders in proportion to the number
of shares of
the Funds held by them and
recorded on the books of the Funds.
Liability of Trustees/Directors. The Master Trust Agreement of
the Trust
provides that the Trustees
and officers shall be indemnified against all liabilities arising
by reason of
such person being or having been
such a Trustee or officer, except for such person's bad faith,
willful
misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of such
person's
office. The By-Laws of the
Investment Funds provide that each Director and officer shall be
indemnified
against liabilities and
expenses incurred in connection with litigation in which they may
be involved
because of their positions
with the Investment Funds, to the fullest extent permitted by
Maryland General
Corporation Law, except
for such person's willful misfeasance, bad faith, gross negligence
or reckless
disregard of the duties
involved in the conduct of his or her office or under any contract
or
agreement with the Investment Funds.
Rights of Inspection. Maryland law permits any shareholder of the
Investment
Funds or any agent of
such shareholder to inspect and copy during the Special Equities
Fund's usual
business hours the Fund's
By-Laws, minutes of shareholder proceedings, annual statements of
the Special
Equities Fund's affairs and
voting trust agreements on file at its principal office.
Shareholders of the
Trust have the same inspection
rights as are permitted shareholders of a Massachusetts
corporation under
Massachusetts corporate law.
Currently, each shareholder of a Massachusetts corporation is
permitted to
inspect the records, accounts
and books of a corporation for any legitimate business purpose.
Shareholder Liability. Under Maryland law, Investment Funds'
shareholders do
not have personal
liability for the Special Equities Fund's corporate acts and
obligations.
Shares of the Special Equities Fund
issued to the shareholders of the Telecommunications Growth Fund
in the
Reorganization will be fully paid
and nonassessable when issued, transferable without restrictions
and will have
no preemptive rights. Under
Massachusetts law, shareholders of the Telecommunications Growth
Fund may,
under certain
circumstances, be held personally liable for the obligations of
the
Telecommunications Growth Fund. The
Trust's Master Trust Agreement, however, disclaims shareholder
liability for
acts or obligations of the
Telecommunications Growth Fund and requires that notice of such
disclaimer be
given in each agreement,
obligation or instrument entered into or executed by the Fund.
The Master
Trust Agreement also provides
indemnification out of the property of the Telecommunications
Growth Fund for
all losses and expenses of
any shareholder held personally liable for the obligations of the
Telecommunications Growth Fund.
The foregoing is only a summary of certain information with
respect to the
Special Equities Fund and
the Telecommunications Growth Fund. The foregoing is not a
complete
description of the documents cited.
Shareholders should refer to the provisions of the corporate
documents and
state laws governing each Fund
for a more thorough description.
ADDITIONAL INFORMATION ABOUT
THE SPECIAL EQUITIES FUND
AND THE TELECOMMUNICATIONS GROWTH FUND
The Telecommunications Growth Fund. Information about the
Telecommunications
Growth Fund is
incorporated herein by reference from its current Prospectus dated
April 29,
1996, as supplemented on
May 7, 1996, and the Statement of Additional Information dated
April 29, 1996,
which has been filed with
the Securities and Exchange Commission (SEC). A copy of the
Prospectus and
the Statement of
Additional Information is available upon request and without
charge by writing
the Telecommunications
Growth Fund at 388 Greenwich Street, New York, New York 10013 or
by calling
(800) 224-7523.
The Special Equities Fund. Information concerning the operation
and
management of the Special
Equities Fund is incorporated herein by reference to the
Prospectus, a copy of
which accompanies this
Prospectus/Proxy Statement, and Statement of Additional
Information, each
dated April 29, 1996, which
have been filed with the SEC. A copy of such Statement of
Additional
Information is available upon
request and without charge by writing the Special Equities Fund at
388
Greenwich Street, New York, New
York 10013 or by calling (800) 224-7523.
Both the Special Equities Fund and the Telecommunications Growth
Fund are
subject to the
informational requirements of the Exchange Act and in accordance
therewith
file reports and other
information including proxy material, reports and charter
documents with the
SEC. These reports can be
inspected and copies obtained at the Public Reference Facilities
maintained by
the SEC at 450 Fifth Street,
NW, Washington, D.C. 20549 and at the New York Regional Office of
the SEC, 75
Park Place, New
York, New York 10007. Copies of such material can also be
obtained from the
Public Reference Branch,
Office of Consumer Affairs and Information Services, SEC,
Washington, D.C.
20549 at prescribed rates.
OTHER BUSINESS
The Trustees of the Trust do not intend to present any other
business at the
Meeting. If, however, any
other matters are properly brought before the Meeting, the persons
named in
the accompanying form of
proxy will vote thereon in accordance with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation
of proxies by the Board
of Trustees of the Trust to be used at the Special Meeting of
Shareholders to
be held at [ ] p.m. on
September 19, 1996, at 388 Greenwich Street, New York, New York
10013 and at
any adjournments
thereof. This Prospectus/Proxy Statement, along with a Notice of
the Meeting
and a proxy card, is first
being mailed to shareholders of the Telecommunications Growth Fund
on or about
[ ], 1996. Only
shareholders of record as of the close of business on the Record
Date will be
entitled to notice of, and to
vote at, the Meeting or any adjournment thereof. The holders of a
majority of
the shares of the
Telecommunications Growth Fund outstanding at the close of
business on the
Record Date present in
person or represented by proxy will constitute a quorum for the
Meeting. For
purposes of determining a
quorum for transacting business at the Meeting, abstentions and
broker "non-
votes" (that is, proxies from
brokers or nominees indicating that such persons have not received
instructions from the beneficial owner
or other persons entitled to vote shares on a particular matter
with respect
to which the brokers or nominees
do not have discretionary power) will be treated as shares that
are present
but which have not been voted.
For this reason, abstentions and broker non-votes will have the
effect of a
"no" vote for purposes of
obtaining the requisite approval of the Plan. If the enclosed
form of proxy
is properly executed and
returned in time to be voted at the Meeting, the proxies named
therein will
vote the shares represented by
the proxy in accordance with the instructions marked thereon.
Unmarked
proxies will be voted FOR the
proposed Reorganization and FOR any other matters deemed
appropriate. A proxy
may be revoked at any
time on or before the Meeting by written notice to the
Telecommunications
Growth Fund, 388 Greenwich
Street, New York, New York 10013, 22nd Floor, c/o the Corporate
Secretary.
Unless revoked, all valid
proxies will be voted in accordance with the specifications
thereon or, in the
absence of such specifications,
FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a
majority, as
defined in the 1940 Act, of the
outstanding shares of the Telecommunications Growth Fund, which is
the lesser
of (i) 67% of the voting
securities of the Telecommunications Growth Fund present at the
Meeting, if
the holders of more than 50%
of the outstanding voting securities of the Telecommunications
Growth Fund are
present or represented by
proxy, or (ii) more than 50% of the outstanding shares of the
Telecommunications Growth Fund.
Shareholders of Class A, Class B and Class C shares of the
Telecommunications
Growth Fund shall vote
together as a single class. Shareholders of the
Telecommunications Growth
Fund are entitled to one vote
for each share.
Proxy solicitations will be made primarily by mail, but proxy
solicitations
also may be made by
telephone, telegraph or personal interviews conducted by officers
and
employees of Smith Barney and its
affiliates and/or by FDISG. In addition, Applied Mailing Systems,
Inc., an
affiliate of FDISG ("Applied
Mailing"), or an agent of Applied Mailing, may call shareholders
to ask if
they would be willing to
authorize the voting of their shares in accordance with the
instructions given
over the telephone by the
shareholders. The latter telephone vote solicitation procedure is
designed to
authenticate the shareholder's
identity by asking the shareholder to provide his or her social
security
number (in the case of an individual)
or taxpayer identification number (in the case of an entity). The
shareholder's telephone instructions will
be implemented in a proxy executed by Applied Mailing or its agent
and a
confirmation will be sent to the
shareholder to ensure that the vote has been authorized in
accordance with the
shareholder's instructions.
Although a shareholder's vote may be solicited and cast in this
manner, each
shareholder will receive a
copy of this Prospectus/Proxy Statement and may vote by mail using
the
enclosed proxy card. The
Telecommunications Growth Fund believes that this telephonic
voting system
will comply with
Massachusetts law and will obtain an opinion of counsel to that
effect prior
to implementing such
procedures. The aggregate cost of solicitation of the
shareholders of the
Telecommunications Growth Fund
is expected to be approximately $45,000. Expenses of the
Reorganization,
including the costs of the proxy
solicitation and the preparation of enclosures to the
Prospectus/Proxy
Statement, reimbursement of
expenses of forwarding solicitation material to beneficial owners
of shares of
the Telecommunications
Growth Fund and expenses incurred in connection with the
preparation of this
Prospectus/Proxy Statement
will be borne by the Telecommunications Growth Fund and the
Special Equities
Fund in proportion to their
assets.
In the event that sufficient votes to approve the Reorganization
are not
received by September 19,
1996, the persons named as proxies may propose one or more
adjournments of the
Meeting to permit
further solicitation of proxies. In determining whether to
adjourn the
Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage
of negative
votes actually cast, the nature
of any further solicitation and the information to be provided to
shareholders
with respect to the reasons for
the solicitation. Any such adjournment will require an
affirmative vote by
the holders of a majority of the
shares present in person or by proxy and entitled to vote at the
Meeting. The
persons named as proxies will
vote upon such adjournment after consideration of the best
interests of all
shareholders.
The votes of the shareholders of the Special Equities Fund are not
being
solicited by this
Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets and liabilities of the
Telecommunications
Growth Fund and the
Special Equities Fund each as of December 31, 1995, and the
Financial
Highlights table, related statements
of operations for the year then ended and changes in net assets
for the two
years then ended and selected per
share data and ratios, have been incorporated by reference into
the Statement
of Additional Information
relating to this Prospectus/Proxy Statement in reliance on the
reports of KPMG
Peat Marwick, L.L.P.,
independent auditors for the Telecommunications Growth Fund and
the Special
Equities Fund given on the
authority of such firms as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the
Special
Equities Fund will be passed
upon by Willkie Farr & Gallagher, One Citicorp Center, 153 East
53rd Street,
New York, NY 10022.
THE BOARD OF TRUSTEES OF THE TELECOMMUNICATIONS TRUST ON
BEHALF OF THE TELECOMMUNICATIONS GROWTH FUND, INCLUDING THE
"NON-INTERESTED" TRUSTEES, UNANIMOUSLY RECOMMEND APPROVAL OF
THE PLAN, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is
made
as of this 29th day of July, 1996, by and between Smith Barney
Investment
Funds Inc. ("Smith Barney
Investment Funds"), a Maryland corporation with its principal
place of
business at 388 Greenwich Street,
New York, New York 10013, on behalf of the Special Equities Fund
(the
"Acquiring Fund"), an investment
portfolio of Smith Barney Investment Funds and Smith Barney
Telecommunications
Trust
("Telecommunications Trust"), a business trust organized under the
laws of The
Commonwealth of
Massachusetts with its principal place of business at 388
Greenwich Street,
New York, New York 10013,
on behalf of the Telecommunications Growth Fund (the "Acquired
Fund"), an
investment fund of
Telecommunications Trust.
This Agreement is intended to be and is adopted as a
plan of
reorganization and liquidation
within the meaning of Section 368(a)(1)(C) of the United States
Internal
Revenue Code of 1986, as
amended (the "Code"). The reorganization (the "Reorganization")
will consist
of the transfer of all or
substantially all of the assets of the Acquired Fund in exchange
for shares of
common stock of the
Acquiring Fund (collectively, the "Acquiring Fund Shares" and
each, an
"Acquiring Fund Share") and the
assumption by the Acquiring Fund of certain scheduled liabilities
of the
Acquired Fund and the
distribution, after the Closing Date herein referred to, of
Acquiring Fund
Shares to the shareholders of the
Acquired Fund in liquidation of the Acquired Fund and the
termination of the
Acquired Fund, all upon the
terms and conditions hereinafter set forth in this Agreement.
WHEREAS, Smith Barney Investment Funds and
Telecommunications
Trust are
registered investment companies of the management type and the
Acquired Fund
owns securities that
generally are assets of the character in which the Acquiring Fund
is permitted
to invest;
WHEREAS, Smith Barney Investment Funds is authorized
to issue
shares of common
stock and Telecommunications Trust is authorized to issue shares
of beneficial
interest;
WHEREAS, the Trustees of Telecommunications Trust have
determined
that the exchange
of all or substantially all of the assets and certain of the
liabilities of
the Acquired Fund for Acquiring Fund
Shares and the assumption of such liabilities by Smith Barney
Investment Funds
on behalf of the Acquiring
Fund is in the best interests of the Acquired Fund's shareholders
and that the
interests of the existing
shareholders of the Acquired Fund would not be diluted as a result
of this
transaction;
WHEREAS, the Board of Directors of Smith Barney
Investment Funds
has determined
that the exchange of all or substantially all of the assets of the
Acquired
Fund for Acquiring Fund Shares is
in the best interests of the Acquiring Fund's shareholders and
that the
interests of the existing shareholders
of the Acquiring Fund would not be diluted as a result of this
transaction;
NOW, THEREFORE, in consideration of the premises and of the
covenants
and agreements
hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR THE
ACQUIRING FUND SHARES AND ASSUMPTION OF THE ACQUIRED FUND'S
SCHEDULED LIABILITIES AND LIQUIDATION AND TERMINATION OF THE
ACQUIRED FUND
1.1. Subject to the terms and conditions herein set
forth and on
the basis of the
representations and warranties contained herein,
Telecommunications Trust, on
behalf of the Acquired
Fund agrees to transfer the Acquired Fund's assets as set forth in
paragraph
1.2 to Smith Barney
Investment Funds on behalf of the Acquiring Fund, and Smith Barney
Investment
Funds on behalf of the
Acquiring Fund agrees in exchange therefor: (i) to deliver to the
Acquired
Fund the number of Class A
Acquiring Fund Shares, including fractional Class A Acquiring Fund
Shares,
determined by dividing the
value of the Acquired Fund's net assets attributable to its Class
A shares,
computed in the manner and as of
the time and date set forth in paragraph 2.1, by the net asset
value of one
Class A Acquiring Fund Share,
computed in the manner and as of the time and date set forth in
paragraph 2.2;
(ii) to deliver to the
Acquired Fund the number of Class B Acquiring Fund Shares,
including
fractional Class B Acquiring Fund
Shares, determined by dividing the value of the Acquired Fund's
net assets
attributable to its Class B
shares, computed in the manner and as of the time and date set
forth in
paragraph 2.1, by the net asset
value of one Class B Acquiring Fund Share, computed in the manner
and as of
the time and date set forth
in paragraph 2.2; (iii) to deliver to the Acquired Fund the number
of Class C
Acquiring Fund Shares,
including fractional Class C Acquiring Fund Shares, determined by
dividing the
value of the Acquired
Fund's net assets attributable to its Class C shares, computed in
the manner
and as of the time and date set
forth in paragraph 2.1, by the net asset value of one Class C
Acquiring Fund
Share, computed in the
manner and as of the time and date set forth in paragraph 2.2; and
(iv) to
assume certain scheduled
liabilities of the Acquired Fund, as set forth in paragraph 1.3.
Such
transactions shall take place at the
closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be
acquired by Smith
Barney Investment
Funds on behalf of the Acquiring Fund shall consist of all or
substantially
all of its property, including,
without limitation, all cash, securities and dividends or interest
receivables
which are owned by the
Acquired Fund and any deferred or prepaid expenses shown as an
asset on the
books of the Acquired Fund
on the closing date provided in paragraph 3.1 (the "Closing
Date").
(b) The Acquired Fund has provided the
Acquiring Fund with
a list of all of the
Acquired Fund's assets as of the date of execution of this
Agreement. The
Acquired Fund reserves the right
to sell any of the securities but will not, without the prior
approval of the
Acquiring Fund, acquire any
additional securities other than securities of the type in which
the Acquiring
Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the
Closing Date,
furnish the Acquired Fund
with a statement of the Acquiring Fund's investment objectives,
policies and
restrictions and a list of the
securities, if any, on the Acquired Fund's list referred to in the
first
sentence of this paragraph which do not
conform to the Acquiring Fund's investment objectives, policies
and
restrictions. In the event that the
Acquired Fund holds any investments which the Acquiring Fund may
not hold, the
Acquired Fund will
dispose of such securities prior to the Closing Date. In
addition, if it is
determined that the portfolios of the
Acquired Fund and the Acquiring Fund, when aggregated, would
contain
investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with
respect to such
investments, the Acquired
Fund, if requested by the Acquiring Fund, will dispose of and/or
reinvest a
sufficient amount of such
investments as may be necessary to avoid violating such
limitations as of the
Closing Date.
1.3. Telecommunications Trust, on behalf of the
Acquired Fund
will endeavor to
discharge all the Acquired Fund's known liabilities and
obligations prior to
the Closing Date. Smith Barney
Investment Funds on behalf of the Acquiring Fund shall assume all
liabilities,
expenses, costs, charges and
reserves reflected on an unaudited Statement of Assets and
Liabilities of the
Acquired Fund prepared as of
the Valuation Date (as defined in paragraph 2.1), in accordance
with generally
accepted accounting
principles consistently applied from the prior audited period.
Smith Barney
Investment Funds on behalf of
the Acquiring Fund shall assume only those liabilities of the
Acquired Fund
reflected in that unaudited
Statement of Assets and Liabilities and shall not assume any other
liabilities, whether absolute or
contingent, not reflected therein.
1.4. As provided in paragraph 3.4, as soon after the
Closing Date
as is conveniently
practicable (the "Liquidation Date"), the Acquired Fund will
liquidate and
distribute pro rata to the
Acquired Fund's shareholders of record determined as of the close
of business
on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring Fund Shares it
receives pursuant
to paragraph 1.1.
Shareholders of Class A, Class B and Class C shares of the
Acquired Fund shall
receive Class A, Class B
and Class C shares, respectively, of the Acquiring Fund. Such
liquidation and
distribution will be
accomplished by the transfer of the Acquiring Fund Shares then
credited to the
account of the Acquired
Fund on the books of the Acquiring Fund to open accounts on the
share records
of the Acquiring Fund in
the name of the Acquired Fund's shareholders and representing the
respective
pro rata number of the
Acquiring Fund Shares due such shareholders. All issued and
outstanding
shares of the Acquired Fund will
simultaneously be canceled on the books of the Acquired Fund,
although share
certificates representing
interests in the Acquired Fund will represent a number of
Acquiring Fund
Shares after the Closing Date as
determined in accordance with paragraph 1.1. The Acquiring Fund
shall not
issue certificates representing
the Acquiring Fund Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown
on the
books of the Acquiring
Fund's transfer agent. Acquiring Fund Shares will be issued in
the manner
described in the Acquiring
Fund's current prospectus and statement of additional information.
1.6. Any transfer taxes payable upon issuance of the
Acquiring
Fund Shares in a name
other than the registered holder of the Acquired Fund Shares on
the books of
the Acquired Fund as of that
time shall, as a condition of such issuance and transfer, be paid
by the
person to whom such Acquiring
Fund Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired
Fund is and
shall remain the
responsibility of the Acquired Fund up to and including the
Closing Date and
such later dates on which the
Acquired Fund is terminated and deregistered.
1.8. The Acquired Fund shall, following the Closing
Date and the
making of all
distributions pursuant to paragraph 1.4, be terminated under the
laws of The
Commonwealth of
Massachusetts and in accordance with its governing documents and
shall apply
for an order of the
Securities and Exchange Commission (the "Commission") under
Section 8(f) of
the Investment Company
Acto of 1940 (the "1940 Act") declaring that it has ceased to be
an investment
company.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be
acquired by
the Acquiring Fund
hereunder shall be the value of such assets computed as of the
close of
regular trading on the New York
Stock Exchange, Inc. (the "NYSE") on the Closing Date (such time
and date
being hereinafter called the
"Valuation Date"), using the valuation procedures set forth in
the Acquiring
Fund's then current prospectus
or statement of additional information.
2.2. The net asset value of Acquiring Fund Shares
shall be the
net asset value per share
computed as of the close of regular trading on the NYSE on the
Valuation Date,
using the valuation
procedures set forth in the Acquiring Fund's then current
prospectus or
statement of additional information.
2.3. All computations of value shall be made by Smith
Barney
Mutual Funds
Management Inc. in accordance with its regular practice as pricing
agent for
the Acquired Fund and the
Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be September 20, 1996, or
such later
date as the parties may
agree to in writing. All acts taking place at the Closing shall
be deemed to
take place simultaneously as of
the close of business on the Closing Date unless otherwise
provided. The
Closing shall be held as of 5:00
p.m. at the offices of Smith Barney Inc., 388 Greenwich Street,
New York, New
York 10013, or at such
other time and/or place as the parties may agree.
3.2. In the event that on the Valuation Date (a) the
NYSE or
another primary trading
market for portfolio securities of the Acquiring Fund or the
Acquired Fund
shall be closed to trading or
trading thereon shall be restricted or (b) trading or the
reporting of trading
on the NYSE or elsewhere shall
be disrupted so that accurate appraisal of the value of the net
assets of the
Acquiring Fund or the Acquired
Fund is impracticable, the Closing Date shall be postponed until
the first
business day after the day when
trading shall have been fully resumed and reporting shall have
been restored.
3.3. The Acquired Fund shall deliver at the Closing a
list of the
names and addresses of
the Acquired Fund's shareholders and the number and percentage
ownership of
outstanding shares owned
by each such shareholder immediately prior to the Closing,
certified on behalf
of the Acquired Fund by its
President. The Acquiring Fund shall issue and deliver a
confirmation
evidencing the Acquiring Fund
Shares to be credited to the Acquired Fund's account on the
Closing Date to
the Secretary of the Acquired
Fund, or provide evidence satisfactory to the Acquired Fund that
such
Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the
Acquiring Fund.
At the Closing, each party
shall deliver to the other such bills of sale, checks,
assignments, share
certificates, if any, receipts or other
documents as such other party or its counsel may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Telecommunications Trust and the Acquired Fund
represent and
warrant to Smith
Barney Investment Funds and the Acquiring Fund as follows:
(a) Telecommunications Trust is a business trust,
duly organized,
validly existing and in
good standing under the laws of The Commonwealth of Massachusetts;
(b) Telecommunications Trust is a registered
investment company
classified as a
management company of the open-end type, and its registration with
the
Commission as an investment
company under the 1940 Act is in full force and effect;
(c) Telecommunications Trust is not, and the
execution, delivery
and performance of this
Agreement will not result, in a material violation of its Master
Trust
Agreement or By-laws or of any
agreement, indenture, instrument, contract, lease or other
undertaking to
which the Acquired Fund is a
party or by which it is bound;
(d) Telecommunications Trust has no material
contracts or other
commitments (other than
this Agreement) which will be terminated with liability to the
Acquired Fund
prior to the Closing Date;
(e) No material litigation or administrative
proceeding or
investigation of or before any
court or governmental body is presently pending or to its
knowledge threatened
against
Telecommunications Trust or the Acquired Fund or any of the
Acquired Fund's
properties or assets, except
as previously disclosed to the Acquiring Fund. The Acquired Fund
knows of no
facts which might form the
basis for the institution of such proceedings and is not party to
or subject
to the provisions of any order,
decree or judgment of any court or governmental body which
materially and
adversely affects its business
or its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the
Acquired Fund
for the period ended
December 31, 1995 have been audited by KPMG Peat Marwick LLP,
independent
certified public
accountants, and are in accordance with generally accepted
accounting
principles consistently applied, and
such statements (copies of which have been furnished to the
Acquiring Fund)
fairly reflect the financial
condition of the Acquired Fund as of such date, and there are no
known
contingent liabilities of the
Acquired Fund as of such date not disclosed therein;
(g) The Acquired Fund will file its final federal and
other tax
returns for the period ending
on the Closing Date in accordance with the Code. At the Closing
Date, all
federal and other tax returns and
reports of the Acquired Fund required by law then to have been
filed prior to
the Closing Date shall have
been filed, and all federal and other taxes shown as due on such
returns shall
have been paid so far as due,
or provision shall have been made for the payment thereof and, to
the best of
the Acquired Fund's
knowledge, no such return is currently under audit and no
assessment has been
asserted with respect to
such returns;
(h) For the most recent fiscal year of its operation,
the
Acquired Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a
regulated investment
company;
(i) All issued and outstanding shares of the Acquired
Fund are,
and at the Closing Date
will be, duly and validly issued and outstanding, fully paid and
non-
assessable. All of the issued and
outstanding shares of the Acquired Fund will, at the time of
Closing, be held
by the persons and in the
amounts set forth in the records of the transfer agent as provided
in
paragraph 3.4. The Acquired Fund
does not have outstanding any options, warrants or other rights to
subscribe
for or purchase any shares of
the Acquired Fund, nor is there outstanding any security
convertible into any
shares of the Acquired Fund;
(j) At the Closing Date, the Acquired Fund will have
good and
marketable title to its
assets to be transferred to the Acquiring Fund pursuant to
paragraph 1.2 and
full right, power and authority
to sell, assign, transfer and deliver such assets hereunder and,
upon delivery
and payment for such assets,
the Acquiring Fund will acquire good and marketable title thereto,
subject to
no restrictions on the full
transfer thereof, including such restrictions as might arise under
the
Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(k) The execution, delivery and performance of this
Agreement has
been duly authorized
by all necessary action on the part of Telecommunications Trust's
Board of
Trustees, and subject to the
approval of the Acquired Fund's shareholders, this Agreement,
assuming due
authorization, execution and
delivery by the Acquiring Fund, will constitute a valid and
binding obligation
of the Acquired Fund,
enforceable in accordance with its terms, subject as to
enforcement, to
bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors'
rights and to general equity
principles;
(l) The information to be furnished by the Acquired
Fund for use
in no-action letters,
applications for exemptive orders, registration statements, proxy
materials
and other documents which may
be necessary in connection with the transactions contemplated
hereby shall be
accurate and complete in all
material respects and shall comply in all material respects with
federal
securities and other laws and
regulations thereunder applicable thereto; and
(m) The proxy statement of the Acquired Fund (the
"Proxy
Statement") to be included in
the Registration Statement referred to in paragraph 5.7 (other
than
information therein that relates to the
Acquiring Fund) will, on the effective date of the Registration
Statement and
on the Closing Date, not
contain any untrue statement of a material fact or omit to state a
material
fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances
under which such statements were
made, not materially misleading.
4.2. Smith Barney Investment Funds and the Acquiring
Fund
represent and warrant to
Telecommunications Trust and the Acquired Fund as follows:
(a) The Acquiring Fund is a portfolio of Smith Barney
Investment
Funds, which is a
corporation, duly organized, validly existing and in good standing
under the
laws of the State of Maryland;
(b) Smith Barney Investment Funds is a registered
investment
company classified as a
management company of the open-end type and its registration with
the
Commission as an investment
company under the 1940 Act is in full force and effect;
(c) The current prospectus of the Acquiring Fund and
the
statement of additional
information of Smith Barney Investment Funds conform in all
material respects
to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations of
the Commission thereunder
and do not include any untrue statement of a material fact or omit
to state
any material fact required to be
stated therein or necessary to make the statements therein, in
light of the
circumstances under which they
were made, not materially misleading;
(d) At the Closing Date, Smith Barney Investment
Funds will have
good and marketable
title to the Acquiring Fund's assets;
(e) Smith Barney Investment Funds is not, and the
execution,
delivery and performance of
this Agreement on behalf of the Acquiring Fund will not result, in
a material
violation of its Articles of
Incorporation or By-laws or of any agreement, indenture,
instrument, contract,
lease or other undertaking
with respect to the Acquiring Fund to which Smith Barney
Investment Funds is a
party or by which it is
bound;
(f) No material litigation or administrative
proceeding or
investigation of or before any
court or governmental body is presently pending or threatened
against Smith
Barney Investment Funds with
respect to the Acquiring Fund or any of the Acquiring Fund's
properties or
assets, except as previously
disclosed in writing to the Acquired Fund. Smith Barney
Investment Funds and
the Acquiring Fund know
of no facts which might form the basis for the institution of such
proceedings
and neither Smith Barney
Investment Funds nor the Acquiring Fund is a party to or subject
to the
provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely
affects the Acquiring Fund's
business or Smith Barney Investment Funds' ability on behalf of
the Acquiring
Fund to consummate the
transactions contemplated herein;
(g) At the Closing Date, all federal and other tax
returns and
reports of the Acquiring
Fund required by law then to have been filed by such dates shall
have been
filed, and all federal and other
taxes shown as due on said returns and reports shall have been
paid so far as
due, or provision shall have
been made for the payment thereof and, to the best of the
Acquiring Fund's
knowledge, no such return is
currently under audit and no assessment has been asserted with
respect to such
returns;
(h) For the most recent fiscal year of its operation,
the
Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a
regulated investment
company and the Acquiring Fund intends to do so in the future;
(i) At the date hereof, all issued and outstanding
shares of the
Acquiring Fund are, and at
the Closing Date will be, duly and validly issued and outstanding,
fully paid
and non-assessable, with no
personal liability attaching to the ownership thereof. The
Acquiring Fund
does not have outstanding any
options, warrants or other rights to subscribe for or purchase any
shares of
the Acquiring Fund, nor is there
outstanding any security convertible into shares of the Acquiring
Fund;
(j) The execution, delivery and performance of this
Agreement has
been duly authorized
by all necessary action, if any, on the part of Smith Barney
Investment Funds'
Board of Directors and
assuming due authorization, execution and delivery by
Telecommunications
Trust, this Agreement
constitutes a valid and binding obligation of Smith Barney
Investment Funds on
behalf of the Acquiring
Fund, enforceable in accordance with its terms, subject as to
enforcement, to
bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors'
rights and to general equity
principles;
(k) The Acquiring Fund Shares to be issued and
delivered to the
Acquired Fund, for the
account of the Acquired Fund Shareholders, pursuant to the terms
of this
Agreement, will at the Closing
Date have been duly authorized and, when so issued and delivered,
will be duly
and validly issued
Acquiring Fund Shares, and will be fully paid and non-assessable
with no
personal liability attaching to the
ownership thereof;
(l) The information to be furnished by the Acquiring
Fund for use
in no-action letters,
applications for exemptive orders, registration statements, proxy
materials
and other documents which may
be necessary in connection with the transactions contemplated
hereby shall be
accurate and complete in all
material respects and shall comply in all material respects with
federal
securities and other laws and
regulations applicable thereto;
(m) The Proxy Statement to be included in the
Registration
Statement (only insofar as it
relates to the Acquiring Fund and Smith Barney Investment Funds)
will, on the
effective date of the
Registration Statement and on the Closing Date, not contain any
untrue
statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make
the statements therein, in light of
the circumstances under which such statements were made, not
materially
misleading; and
(n) Smith Barney Investment Funds, on behalf of the
Acquiring
Fund, agrees to use all
reasonable efforts to obtain the approvals and authorizations
required by the
1933 Act, the 1940 Act and
such of the state Blue Sky or securities laws as it may deem
appropriate in
order to continue the Acquiring
Fund's operations after the Closing Date.
5. COVENANTS OF TELECOMMUNICATIONS TRUST, THE ACQUIRED FUND,
THE
ACQUIRING FUND AND SMITH BARNEY INVESTMENT FUNDS
5.1. Smith Barney Investment Funds on behalf of the
Acquiring
Fund and
Telecommunications Trust on behalf of the Acquired Fund each will
operate its
business in the ordinary
course between the date hereof and the Closing Date. It is
understood that
such ordinary course of business
will include the declaration and payment of customary dividends
and
distributions and any other dividends
and distributions deemed advisable, in each case payable either in
cash or in
additional shares.
5.2. Telecommunications Trust on behalf of the
Acquired Fund will
call a meeting of its
shareholders to consider and act upon this Agreement and to take
all other
action necessary to obtain
approval of the transactions contemplated herein.
5.3. Telecommunications Trust on behalf of the
Acquired Fund
covenants that the
Acquiring Fund Shares to be issued hereunder are not being
acquired for the
purpose of making any
distribution thereof other than in accordance with the terms of
this
Agreement.
5.4. The Acquired Fund will assist the Acquiring Fund
in
obtaining such information as
the Acquiring Fund reasonably requests concerning the beneficial
ownership of
the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement,
Telecommunications Trust on behalf of
the Acquired Fund and Smith Barney Investment Funds on behalf of
the Acquiring
Fund, each will take, or
cause to be taken, all action, and do or cause to be done, all
things
reasonably necessary, proper or
advisable to consummate and make effective the transactions
contemplated by
this Agreement.
5.6. As promptly as practicable, but in any case
within sixty
days after the Closing Date,
the Acquired Fund shall furnish the Acquiring Fund, in such form
as is
reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the
Acquired Fund
for federal income tax
purposes which will be carried over to the Acquiring Fund as a
result of
Section 381 of the Code, and
which will be certified by the President and Treasurer of the
Acquired Fund.
5.7. The Acquired Fund will provide the Acquiring
Fund with
information reasonably
necessary for the preparation of a prospectus (the "Prospectus")
which will
include the Proxy Statement,
referred to in paragraph 4.1(m), all to be included in a
Registration
Statement on Form N-14 of Smith
Barney Investment Funds (the "Registration Statement"), in
compliance with the
1933 Act, the Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act in
connection with the
meeting of the Acquired
Fund's shareholders to consider approval of this Agreement and the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF TELECOMMUNICATIONS
TRUST IN RESPECT OF THE ACQUIRED FUND
The obligations of Telecommunications Trust and the
Acquired Fund
to consummate the
transactions provided for herein shall be subject, at its
election, to the
performance by Smith Barney
Investment Funds and the Acquiring Fund of all of the obligations
to be
performed by them hereunder on or
before the Closing Date and, in addition thereto, the following
further
conditions:
6.1. All representations and warranties of Smith
Barney
Investment Funds and the
Acquiring Fund contained in this Agreement shall be true and
correct in all
material respects as of the date
hereof and, except as they may be affected by the transactions
contemplated by
this Agreement, as of the
Closing Date with the same force and effect as if made on and as
of the
Closing Date;
6.2. Smith Barney Investment Funds on behalf of the
Acquiring
Fund shall have delivered
to Telecommunications Trust a certificate executed in its name by
its
President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to
Telecommunications Trust and dated
as of the Closing Date, to the effect that the representations and
warranties
of Smith Barney Investment
Funds and the Acquiring Fund made in this Agreement are true and
correct at
and as of the Closing Date,
except as they may be affected by the transactions contemplated by
this
Agreement; and
6.3. Telecommunications Trust shall have received on
the Closing
Date a favorable
opinion from Willkie Farr & Gallagher, counsel to the Acquiring
Fund, dated as
of the Closing Date, in a
form reasonably satisfactory to Christina T. Sydor, Esq.,
Secretary of
Telecommunications Trust, covering
the following points:
That (a) Smith Barney Investment Funds is duly
organized and
validly existing under the
laws of
the State of Maryland; (b) Smith Barney Investment Funds is an
open-end
management investment
company registered under the 1940 Act; (c) the Acquiring Fund is a
series of
the Smith Barney
Investment Funds; (d) this Agreement, the reorganization provided
for
hereunder and the execution
of this Agreement have been duly authorized and approved by all
requisite
action of Smith Barney
Investment Funds, and this Agreement has been duly executed and
delivered by
Smith Barney
Investment Funds and is a valid and binding obligation of Smith
Barney
Investment Funds with
respect to the Acquiring Fund enforceable in accordance with its
terms against
the assets of the
Acquiring Fund; and (e) the Acquiring Fund Shares to be issued to
the Acquired
Fund for
distribution to its shareholders pursuant to this Agreement have
been, to the
extent of the number
of Acquiring Fund Shares of the pertinent class authorized to be
issued by the
Acquiring Fund in
the Articles of Incorporation of Smith Barney Investment Funds and
then
unissued, duly authorized
and, subject to the receipt by Smith Barney Investment Funds of
consideration
equal to the net
asset value thereof (but in no event less than the par value
thereof), such
Acquiring Fund Shares,
when issued in accordance with this Agreement, will be validly
issued and
fully paid and
non-assessable. Such opinion may state that it is solely for the
benefit of
Telecommunications
Trust and the Acquired Fund, its Trustees and its officers. Such
counsel may
rely, as to matters
governed by the laws of the State of Maryland, on an opinion of
Maryland
counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY
INVESTMENT
FUNDS IN RESPECT OF THE ACQUIRING FUND
The obligations of Smith Barney Investment Funds on
behalf of the
Acquiring Fund to
complete the transactions provided for herein shall be subject, at
its
election, to the performance by
Telecommunications Trust and the Acquired Fund of all the
obligations to be
performed by it hereunder on
or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of
Telecommunications
Trust and the Acquired
Fund contained in this Agreement shall be true and correct in all
material
respects as of the date hereof and,
except as they may be affected by the transactions contemplated by
this
Agreement, as of the Closing Date
with the same force and effect as if made on and as of the Closing
Date;
7.2. The Acquired Fund shall have delivered to the
Acquiring Fund
a statement of the
Acquired Fund's assets and liabilities, together with a list of
the Acquired
Fund's portfolio securities
showing the tax costs of such securities by lot and the holding
periods of
such securities, as of the Closing
Date, certified by the Treasurer or Assistant Treasurer of the
Acquired Fund;
7.3. Telecommunications Trust shall have delivered to
the
Acquiring Fund on the Closing
Date a certificate executed in its name by its President or Vice
President and
its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Acquiring
Fund and dated
as of the Closing Date, to
the effect that the representations and warranties of
Telecommunications Trust
and the Acquired Fund
made in this Agreement are true and correct at and as of the
Closing Date,
except as they may be affected
by the transactions contemplated by this Agreement; and
7.4. The Acquiring Fund shall have received on the
Closing Date a
favorable opinion of
Willkie Farr & Gallagher, counsel to the Acquired Fund, in a form
satisfactory
to Christina T. Sydor, Esq.,
Secretary of the Acquiring Fund, covering the following points:
That (a) Telecommunications Trust is duly organized and
validly existing
under the laws of The
Commonwealth of Massachusetts; (b) Telecommunications Trust is an
open-end
management
investment company registered under the 1940 Act; (c) the Acquired
Fund is a
sub-trust of the
Telecommunications Trust; and (d) this Agreement, the
reorganization provided
for hereunder and
the execution of this Agreement have been duly authorized and
approved by all
requisite action of
Telecommunications Trust, and this Agreement has been duly
executed and
delivered by
Telecommunications Trust and is a valid and binding obligation of
Telecommunications Trust and
the Acquired Fund enforceable in accordance with its terms against
the assets
of the Acquired
Fund. Such opinion may state that it is solely for the benefit of
Smith
Barney Investment Funds,
its Directors and its officers. Such counsel may rely, as to
matters governed
by the laws of The
Commonwealth of Massachusetts, on an opinion of Massachusetts
counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF
TELECOMMUNICATIONS TRUST, THE ACQUIRED FUND, THE ACQUIRING
FUND AND SMITH BARNEY INVESTMENT FUNDS
If any of the conditions set forth below do not exist
on or before
the Closing Date with
respect to Smith Barney Investment Funds on behalf of the
Acquiring Fund, or
Telecommunications Trust
on behalf of the Acquired Fund, the other party to this Agreement
shall, at
its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated
herein
shall have been approved
by the requisite vote of the holders of the outstanding shares of
the Acquired
Fund in accordance with the
provisions of Telecommunications Trust's Master Trust Agreement
and By-laws
and certified copies of the
votes evidencing such approval shall have been delivered to the
Acquiring
Fund. Notwithstanding anything
herein to the contrary, neither Smith Barney Investment Funds on
behalf of the
Acquiring Fund nor
Telecommunications Trust on behalf of the Acquired Fund may waive
the
conditions set forth in this
paragraph 8.1;
8.2. On the Closing Date, no action, suit or other
proceeding
shall be pending before any
court or governmental agency in which it is sought to restrain or
prohibit, or
obtain damages or other relief
in connection with, this Agreement or the transactions
contemplated herein;
8.3. All consents of other parties and all other
consents, orders
and permits of federal,
state and local regulatory authorities (including those of the
Commission and
of state Blue Sky and
securities authorities, including "no-action" positions of and
exemptive
orders from such federal and state
authorities) deemed necessary by the Acquiring Fund or the
Acquired Fund to
permit consummation, in all
material respects, of the transactions contemplated hereby shall
have been
obtained, except where failure to
obtain any such consent, order or permit would not involve a risk
of a
material adverse effect on the assets
or properties of the Acquiring Fund or the Acquired Fund, provided
that either
party hereto may for itself
waive any of such conditions;
8.4. The Registration Statement shall have become
effective under
the 1933 Act and no
stop orders suspending the effectiveness thereof shall have been
issued and,
to the best knowledge of the
parties hereto, no investigation or proceeding for that purpose
shall have
been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5. The Acquired Fund shall have declared and paid a
dividend or
dividends on the
outstanding shares of the Acquired Fund, which, together with all
previous
such dividends, shall have the
effect of distributing to the shareholders of the Acquired Fund
all of the
investment company taxable
income and exempt-interest income of the Acquired Fund for all
taxable years
ending on or prior to the
Closing Date. The dividend declared and paid by the Acquired Fund
shall also
include all of such fund's
net capital gain realized in all taxable years ending on or prior
to the
Closing Date (after reduction for any
capital loss carryforward);
8.6. The parties shall have received a favorable
opinion of
Willkie Farr & Gallagher,
addressed to Smith Barney Investment Funds in respect of the
Acquiring Fund
and Telecommunications
Trust in respect of the Acquired Fund and satisfactory to
Christina T. Sydor,
Esq., as Secretary of the
Acquiring Fund and the Acquired Fund, substantially to the effect
that for
federal income tax purposes:
(a) the transfer of all or substantially all of the
Acquired Fund's
assets in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain
scheduled liabilities
of the Acquired Fund will constitute a "reorganization" within the
meaning of
Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the Acquired Fund are each
a "party to
a reorganization"
within the meaning of Section 368(b) of the Code; (b) no gain or
loss will be
recognized by the
Acquiring Fund upon the receipt of the assets of the Acquired Fund
in exchange
for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of certain
scheduled
liabilities of the
Acquired Fund; (c) no gain or loss will be recognized by the
Acquired Fund
upon the transfer of
the Acquired Fund's assets to the Acquiring Fund in exchange for
the Acquiring
Fund Shares and
the assumption by the Acquiring Fund of certain scheduled
liabilities of the
Acquired Fund or upon
the distribution (whether actual or constructive) of the Acquiring
Fund Shares
to the Acquired
Fund's shareholders; (d) no gain or loss will be recognized by
shareholders of
the Acquired Fund
upon the exchange of their Acquired Fund shares for the Acquiring
Fund Shares
and the
assumption by the Acquiring Fund of certain scheduled liabilities
of the
Acquired Fund; (e) the
aggregate tax basis for the Acquiring Fund Shares received by each
of the
Acquired Fund's
shareholders pursuant to the Reorganization will be the same as
the aggregate
tax basis of the
Acquired Fund shares held by such shareholder immediately prior to
the
Reorganization, and the
holding period of the Acquiring Fund Shares to be received by each
Acquired
Fund shareholder
will include the period during which the Acquired Fund shares
exchanged
therefor were held by
such shareholder (provided that the Acquired Fund shares were held
as capital
assets on the date of
the Reorganization); and (f) the tax basis of the Acquired Fund's
assets
acquired by the Acquiring
Fund will be the same as the tax basis of such assets to the
Acquired Fund
immediately prior to the
Reorganization, and the holding period of the assets of the
Acquired Fund in
the hands of the
Acquiring Fund will include the period during which those assets
were held by
the Acquired Fund.
Notwithstanding anything herein to the contrary,
neither Smith
Barney Investment Funds
on behalf of the Acquiring Fund nor Telecommunications Trust on
behalf of the
Acquired Fund may waive
the conditions set forth in this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. Smith Barney Investment Funds on behalf of the
Acquiring
Fund represents and
warrants to Telecommunications Trust and the Acquired Fund, and
Telecommunications Trust on behalf of
the Acquired Fund hereby represents and warrants to Smith Barney
Investment
Funds on behalf of the
Acquiring Fund, that there are no brokers or finders entitled to
receive any
payments in connection with the
transactions provided for herein.
9.2. (a) Except as may be otherwise provided herein,
the
Acquiring Fund and the
Acquired Fund shall each be liable, in proportion to their assets,
for the
expenses incurred in connection
with entering into and carrying out the provisions of this
Agreement,
including the expenses of: (i) counsel
and independent accountants associated with the Reorganization;
(ii) printing
and mailing the
Prospectus/Proxy Statement and soliciting proxies in connection
with the
meeting of shareholders of the
Acquired Fund referred to in paragraph 5.2 hereof; (iii) any
special pricing
fees associated with the
valuation of the Acquired Fund's of the Acquiring Fund's portfolio
on the
Closing Date; (iv) expenses
associated with preparing this Agreement and preparing and filing
the
Registration Statement under the
1933 Act covering the Acquiring Fund Shares to be issued in the
Reorganization; (v) registration or
qualification fees and expenses of preparing and filing such
forms, if any,
necessary under applicable state
securities laws to qualify the Acquiring Fund Shares to be issued
in
connection with the Reorganization.
The Acquired Fund shall be liable for: (i) all fees and expenses
related to
the liquidation and termination of
the Acquired Fund; and (ii) fees and expenses of the Acquired
Fund's custodian
and transfer agent incurred
in connection with the Reorganization. The Acquiring Fund shall
be liable for
any fees and expenses of the
Acquiring Fund's custodian and transfer agent incurred in
connection with the
Reorganization.
(b) Consistent with the provisions of paragraph 1.3,
the Acquired
Fund, prior to the
Closing, shall pay for or include in the unaudited Statement of
Assets and
Liabilities prepared pursuant to
paragraph 1.3 all of its known and reasonably estimated expenses
associated
with the transactions
contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made
any
representation, warranty or
covenant not set forth herein and that this Agreement constitutes
the entire
agreement between the parties.
10.2. The representations, warranties and covenants
contained in
this Agreement or in any
document delivered pursuant hereto or in connection herewith shall
survive the
consummation of the
transactions contemplated hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time
prior to the
Closing Date by: (1) the
mutual agreement of Telecommunications Trust on behalf of the
Acquired Fund
and Smith Barney
Investment Funds on behalf of the Acquiring Fund; (2)
Telecommunications Trust
in respect of the
Acquired Fund in the event that Smith Barney Investment Funds in
respect of
the Acquiring Fund shall, or
Smith Barney Investment Funds in respect of the Acquiring Fund in
the event
that Telecommunications
Trust or the Acquired Fund shall, materially breach any
representation,
warranty or agreement contained
herein to be performed at or prior to the Closing Date; or (3) a
condition
herein expressed to be precedent
to the obligations of the terminating party has not been met and
it reasonably
appears that it will not or
cannot be met.
11.2. In the event of any such termination, there
shall be no
liability for damages on the
part of either Telecommunications Trust on behalf of the Acquired
Fund or
Smith Barney Investment
Funds on behalf of the Acquiring Fund or their respective
Trustees/Directors
or officers to the other party,
but each shall bear the expenses incurred by it incidental to the
preparation
and carrying out of this
Agreement as provided in paragraph 9.
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be amended, modified or
supplemented in
such manner as may
be mutually agreed upon in writing by the authorized officers of
Telecommunications Trust and Smith
Barney Investment Funds; provided, however, that following the
meeting of the
Acquired Fund
shareholders called by the Acquired Fund pursuant to paragraph 5.2
of this
Agreement, no such
amendment may have the effect of changing the provisions for
determining the
number of the Acquiring
Fund Shares to be issued to the Acquired Fund's shareholders under
this
Agreement to the detriment of
such shareholders without their further approval.
12.2. At any time prior to the Closing Date either
party hereto
may by written instrument
signed by it (i) waive any inaccuracies in the representations and
warranties
made to it contained herein and
(ii) waive compliance with any of the covenants or conditions made
for its
benefit contained herein.
13. NOTICES
Any notice, report, statement or demand required or
permitted by
any provisions of this
Agreement shall be in writing and shall be given by prepaid
telegraph,
telecopy or certified mail addressed
to Telecommunications Trust, 388 Greenwich Street, 22nd Floor, New
York, New
York 10013, Attention:
Heath B. McLendon; or to Smith Barney Investment Funds, 388
Greenwich Street,
22nd Floor, New
York, New York 10013, Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION
OF LIABILITY
14.1 The article and paragraph headings contained in
this
Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of
counterparts, each of which shall
be deemed an original.
14.3 This Agreement shall be governed by and
construed in
accordance with the laws of
the State of New York.
14.4 This Agreement shall bind and inure to the
benefit of the
parties hereto and their
respective successors and assigns, but no assignment or transfer
hereof or of
any rights or obligations
hereunder shall be made by any party without the written consent
of the other
party. Nothing herein
expressed or implied is intended or shall be construed to confer
upon or give
any person, firm, corporation
or other entity, other than the parties hereto and their
respective successors
and assigns, any rights or
remedies under or by reason of this Agreement.
14.5 It is expressly agreed that the obligations of
Telecommunications Trust in respect of
the Acquired Fund shall not be binding upon any of its Trustees,
shareholders,
nominees, officers, agents or
employees personally, but bind only the trust property of the
Acquired Fund as
provided in the trust
instruments of Telecommunications Trust. The execution and
delivery of this
Agreement have been
authorized by the Trustees of Telecommunications Trust and this
Agreement has
been executed by
authorized officers of Telecommunications Trust, acting as such,
and neither
such authorization by such
Trustees nor such execution and delivery by such officers shall be
deemed to
have been made by any of
them individually or to impose any liability on any of them
personally, but
shall bind only the trust
property of the Acquired Fund as provided in Telecommunications
Trust's Master
Trust Agreement.
IN WITNESS WHEREOF, each of the parties hereto has
caused this
Agreement to be
executed by its Chairman of the Board, President or Vice President
and
attested by its Secretary or
Assistant Secretary.
Attest: SMITH BARNEY INVESTMENT FUNDS INC.
on behalf of the SPECIAL EQUITIES FUND
/s/ Christina T. Sydor By: /s/ Jessica
Bibliowicz
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
Attest: SMITH BARNEY TELECOMMUNICATIONS
TRUST on behalf of the TELECOMMUNICATIONS
GROWTH FUND
/s/ Christina T. Sydor By: /s/ Jessica Bibliowicz
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
STATEMENT OF ADDITIONAL INFORMATION DATED ____________, 1996
Acquisition Of The Assets Of
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
a separate series of
SMITH BARNEY TELECOMMUNICATIONS TRUST
388 Greenwich Street
New York, New York 10013
(800) 244-7523
By And In Exchange For Shares Of
SMITH BARNEY SPECIAL EQUITIES FUND
a separate series of
SMITH BARNEY INVESTMENT FUNDS
388 Greenwich Street
New York, New York 10013
(800) 244-7523
This Statement of Additional Information, relating
specifically to the
proposed transfer of all or
substantially all of the assets of Smith Barney Telecommunications
Growth Fund
of Smith Barney
Telecommunications Trust to Smith Barney Investment Funds on
behalf of Smith
Barney Special Equities
Fund in exchange for shares of the Smith Barney Special Equities
Fund and the
assumption by Smith
Barney Investment Funds on behalf of Smith Barney Special Equities
Fund of
certain scheduled liabilities
of the Telecommunications Growth Fund, consists of this cover page
and the
following described
documents, each of which accompanies this Statement of Additional
Information
and is incorporated herein
by reference.
1. Statement of Additional Information of Smith Barney Special
Equities
Fund dated April
29, 1996.
2. Annual Report of Smith Barney Special Equities Fund for the
fiscal year
December 31,
1995.
3. Annual Report of Smith Barney Telecommunications Growth Fund
for the
fiscal
yearended December 31, 1995.
4. Pro forma financial statements.
This Statement of Additional Information is not a
prospectus. A
Prospectus/Proxy
Statement, dated ___________, 1996, relating to the above-
referenced matter
may be obtained without
charge by calling or writing either Smith Barney Special Equities
Fund or
Smith Barney
Telecommunications Growth Fund at the telephone numbers or
addresses set forth
above or by contacting
any Smith Barney Financial Consultant or by calling toll-free
(800) 244-7523.
This Statement of
Additional Information should be read in cunjunction with the
Prospectus/Proxy
Statement dated
__________, 1996.
The date of this Statement of Additional Information
is
____________, 1996.
Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
April 29, 1996
This Statement of Additional Information expands upon and
supplements the
information contained in the
current Prospectuses of Smith Barney Investment Funds Inc. (the
"Company"),
dated April 29, 1996, as
amended or supplemented from time to time, and should 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 Prospectuses 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, in
incorporated
by reference into the
Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in the
Prospectuses
and this Statement of
Additional Information, except where shown below:
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 24
Redemption of Shares 25
Distributor 26
Valuation of Shares 28
Exchange Privilege 29
Performance Data (See in the Prospectus "Performance")
30
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes")
34
Additional Information 38
Financial Statements 38
Appendix A-1
MANAGEMENT OF THE COMPANY
The executive officers of the Company are employees of certain of
the
organizations that provide services
to
the Company. These organizations are the following:
Name
Service
Smith Barney Inc. ("Smith Barney")
Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM")
Investment Adviser and Administrator
PNC Bank, National Association ("PNC")
Custodian
First Data Investor Services Group, Inc. ("FDISG") ......
Transfer Agent
These organizations and the functions they perform for the Company
are
discussed in the Prospectuses and
in this Statement of Additional Information.
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 person" 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 55). Partner in the law firm of
Murov &
Ades. His address is 272
South
Wellwood Avenue, P.O. Box 504, Lindenhurst, New York 11757.
Herbert Barg, Director (Age 72). Private investor. His
address is 273
Montgomery Avenue, Bala
Cynwyd, Pennsylvania 19004.
Alger B. Chapman, Director (Age 64). Chairman and Chief
Operating
Officer of the Chicago
Board of
Options Exchange. His address is Chicago Board of Options
Exchange, LaSalle at
Van Buren, Chicago,
Illinois 60605.
Dwight B. Crane, Director (Age 58). Professor, Graduate
School of
Business Administration,
Harvard
University. His address is Graduate School of Business
Administration, Harvard
University, Boston,
Massachusetts 02163.
Harvey Eisen, Senior Vice President of Investment Funds of
Travelers Group
Inc. (Age ). His address is
388 Greenwich Street, New York, NY 10013.
Frank G. Hubbard, Director (Age 60). Vice President, S&S
Industries;
Former Corporate Vice
President, Materials Management and Marketing Services of Huls
America, Inc.
His address is 80
Centennial Avenue P.O. Box 456, Piscataway, New Jersey 08855-0456.
Allan R. Johnson, Director Emeritus (Age 79). Retired;
Former Chairman,
Retail Division 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 (Age 62). Managing
Director of
Smith Barney and
Chairman of the Board of Smith Barney Strategy Advisers Inc.;
prior to July
1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers"); Vice
Chairman of Shearson
Asset Management; 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 1411
Broadway, New York, New York 10018.
John F. White, Director (Age 78). President Emeritus of The
Cooper Union
for the Advancement
of
Science and Art; Special Assistant to the President of the Aspen
Institute.
His address is Crows Nest
Road,
Tuxedo Park, New York 10987.
Jessica M. Bibliowicz, President (Age 36). Executive Vice
President of Smith
Barney; prior to 1994,
Director of Sales and Marketing for Prudential Mutual Funds; prior
to 1990,
First Vice President, Asset
Management Division of Shearson Lehman Brothers. Ms. Bibliowicz
also serves
as President of 39 funds
of
the Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York,
New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 55).
President and
Director of Smith Barney
Investment Advisors, a division of SBMFM; Executive Vice President
of Smith
Barney; prior to July 1993,
President of Asset Management Division of Shearson Lehman
Brothers. Mr. Cohen
also serves as Vice
President and Investment Officer of 5 other mutual funds of the
Smith Barney
Mutual Funds. His address
is
388 Greenwich Street, New York, NY 10013.
Richard A. Freeman, Managing Director of Smith Barney (Age
42).
Managing Director of Smith
Barney
Investment Advisors, a division of SBMFM; prior to July 1993,
Executive Vice
President of Shearson
Asset
Management. Mr. Freeman also serves as Vice President and
Investment Officer
of one other mutual fund
of the Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New
York, New York 10013.
John G. Goode, President and Chief Executive Officer of Davis
Skaggs
Investment Management (Age ), a
division of the SBMFM, serves as Vice President of the Security
and Growth
Fund and manages its day-to-
day operations, including making all investment decisions. Mr.
Goode also
serves as Vice President and
Investment Officer of one other mutual fund of the Smith Barney
Mutual Funds.
His address is 1 Sansome
St., Suite 3850 San Francisco, California 94104.
Douglas H. Johnson, Vice President (Age ). Director of Mutual
Fund
Division of Smith Barney. Prior
to January 1995, Vice President of SafeCo Asset Management
Company. His
address is 500 108th
Avenue,
North E., Bellevue, Washington 98004.
George E. Mueller, Jr., Investment Officer (Age ). 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 ). 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.
Lewis E. Daidone, (Age 38). Director and Senior Vice President of
SBMFM. Mr.
Daidone also serves as
Senior Vice President and Treasurer of 41 funds of Smith Barney
Mutual Funds.
His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of
Smith Barney and
Secretary of SBMFM;
General Counsel and Secretary of SBMFM. Ms. Sydor also serves as
Secretary
of 41 funds of the Smith
Barney Mutual Funds. 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, 1996,
the
Directors and officers of the
Company, as a group, owned less than 1.00% of the outstanding
common stock of
the Company.
No officer, director or employee of Smith Barney or any parent or
subsidiary
receives any compensation
from the Company for serving as an officer or Director of the
Company. The
Company pays each Director
who is not an officer, 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, 1995, the Directors of the Company were paid
the following
compensation:
Director
Aggregate Compensation
from the Company
Aggregate Compensation
from the Smith Barney
Mutual Funds
Paul R. Ades (5)
$23,625.00
$20,725.00
Herbert Barg (20)
23,625.00
61,575.00
Alger B. Chapman (9)
23,625.00
19,625.00
Dwight B. Crane (26)
23,625.00
98,975.00
Frank G. Hubbard (5)
23,625.00
19,725.00
Allan G. Johnson (5)(*)
17,125.00
15,600.00
Heath McLendon (41)
N/A
N/A
Ken Miller (5)
23,625.00
20,725.00
John F. White (5)
23,625.00
20,725.00
* Director Emeritus
Investment Adviser and Administrator - SBMFM
SBMFM serves as investment adviser to the Funds pursuant to
separate advisory
agreements (the
"Advisory
Agreements"). With respect to the Investment Grade Bond Fund,
Government
Securities Fund and Special
Equities Fund, the Advisory Agreements were transferred to SBMFM
effective
November 7, 1994, from its
affiliate, 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
Travelers Group Inc. ("Travelers"). The Advisory Agreements with
respect to
the Investment Grade Bond
Fund, Government Securities Fund and Special Equities Fund 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
investment advisers (the "Independent Directors"), on July 27,
1995, and by
shareholders of the respective
Funds on June 9, 1993. With respect to the Managed Growth Fund
and the Growth
Opportunity Fund, the
Advisory Agreements were approved by the Board of Directors,
including the
Independent Directors, on
July 27, 1995, and by shareholders on April 30, 1995. SBMFM bears
all
expenses in connection with the
performance of its services. The services provided by SBMFM under
the
Advisory 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, Special
Equities Fund, Managed Growth Fund and Growth Opportunity Fund,
each Fund pays
SBMFM a fee
computed daily and paid monthly at the annual rates of 0.45%,
0.55%, 0.85% and
1.00%, respectively, 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, 1993, 1994 and 1995, the
Funds accrued
advisory fees as follows:
Fund
1993
1994
1995
Investment Grade Bond Fund
$2,157,373
$1,926,359
$2,067,222
Government Securities Fund
3,357,123
2,578,209
2,287,647
Special Equities Fund
548,764
1,052,635
1,276,355
Managed Growth Fund
2,022,754
Growth Opportunity Fund
390,902
SBMFM also serves as administrator to Investment Grade Bond Fund,
Government
Securities Fund and
Special Equities 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 Independent
Directors, on May 5, 1994. The services provided by SBMFM under
the
Administration Agreement are
described in the Prospectuses under "Management 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 expenses in connection
with the performance of its services. Prior to May 5, 1994, The
Boston
Company Advisors ("Boston
Advisors") served as the Company's sub-investment adviser and/or
administrator.
As compensation for administrative services rendered to each of
Investment
Grade Bond Fund, Government
Securities Fund and Special Equities Fund, SBMFM receives a fee
computed daily
and paid monthly at the
annual rate of 0.20 of the value of the Fund's average daily net
assets. For
the fiscal years ended December
31, 1993, 1994 and 1995, these Funds paid administrative fees to
Boston
Advisors or SBMFM as follows:
Boston Advisors
SBMFM
Fund
1993
For the Fiscal
Period From
1/1/94
through 5/4/94
For the Fiscal
Period from
5/5/94
through
12/31/94
For the Fiscal
Year From
12/1/94
through 12/31/95
Investment Grade Bond Fund
$ 958,700
$ 290,859
$ 565,300
$ 918,765
Government Securities Fund
1,918,367
500,505
972,757
1,307,222
Special Equities Fund
199,551
130,039
252,737
464,129
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, L.L.P., 345 Park Avenue, New York, New York
10154, has been
selected as the
Fund's independent auditor to examine and report on the Fund's
financial
statements and highlights for the
fiscal year ending December 31, 1996.
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
management 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
objective 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 Ratings
Group
("S&P") (See Appendix for a description of these ratings); U.S.
government
securities (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
investment 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 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 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
assets. Included with 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 (the "NYSE") or
the American
Stock Exchange.
Warrants acquired by the Fund in units or attached to securities
will be
deemed to be without value for
purposes of this restriction. These limits are not fundamental
policies of
the Fund and may be changed by
the Board of 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 Depository 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.
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 temporary defensive position by
investing
more heavily in cash or
money
market instruments (such as short-term U.S. government securities,
commercial
paper, and negotiable bank
certificates of deposit) is desirable due to prevailing market or
economic
conditions. This policy was
adopted
in accordance with 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 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 certain 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 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 a 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 repurchase agreement.
SBMFM, acting under the supervision of the Company's Board of
Directors,
reviews 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 repurchase agreement
to purchase other money market instruments which either mature at
a date
simultaneous with or prior to the
expiration of the reverse 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 interest
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
borrowings 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 assets (less all of its
liabilities other than obligations under such agreements).
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
equivalents.
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 entered 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 purchase 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 Company'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
securities
from its portfolio to brokers,
dealers and other financial organizations. 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
securities which are maintained at all
times in an amount at least equal to the current market value of
the loaned
securities. From time to time,
the
Fund may return a part of the interest earned from the investment
of
collateral received for securities loaned
to the borrower and/or a third party, which is unaffiliated with
the Fund or
with Smith Barney, and which
is
acting as a "finder."
In lending its securities, the Fund can increase its income by
continuing to
receive interest on the loaned
securities as well as by either investing the cash collateral in
short-term
instruments or obtaining yield in
the
form of interest paid by the borrower when U.S. government
securities are used
as collateral.
Requirements
of the SEC, which may be subject to further 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 collateral; (c) the Fund
must
be able to terminate the loan at any time; (d) the Fund must
receive
reasonable interest on the loan, as well
as an amount equal to dividends, interest or other distributions
on the loaned
securities, and any increase in
market value; (e) the Fund may pay only reasonable custodian fees
in
connection with the loan; and (f)
voting rights on the loaned securities may pass to the borrower;
provided,
however, that if a material event
adversely affecting the investment in the loaned securities
occurs, the Board
of Directors must terminate the
loan and regain the right to vote the securities. The risks in
lending
portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving
additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should
the
borrower fail financially. Loans will be
made to firms deemed by SBMFM to be of good standing and will not
be made
unless, in the judgment of
SBMFM, the consideration to be earned from such loans would
justify the risk.
Government Securities Fund
The investment objective of Government Securities Fund is high
current return.
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 Treasury
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,
securities
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 instrumentality that it sponsors, the Fund
will invest
in obligations of an
instrumentality 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 investment by the Fund.
It is the Fund's policy that at least 65% of its total assets will
be invested
in U.S. government securities,
including options and futures contracts thereon, except during
times when
SBMFM believes that the
adoption of a temporary defensive position by investing more
heavily in cash
or money market instruments
is
desirable due to prevailing market or economic conditions. This
policy was
adopted in accordance with
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 distribution return consists generally 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, and net gains from sales of portfolio securities
pursuant to
options 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 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 Rate-Related Securities"). The
interest payable
on these securities is
denominated in U.S. dollars, is not subject to foreign currency
risks 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,
depending
on the structure of the
principal repayment formula. The principal repayment 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
currency. Finally, the principal repayment formula can be a
function of more
than one currency and,
therefore, be designed in either of the aforementioned 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 between 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 security, the amount of
principal
repaid at maturity might be
significantly below the par value of the security, which might not
be offset
by the interest earned by the
Fund
over the term of the security. The rate of exchange between the
U.S. dollar
and other currencies is
determined by the forces of supply and demand in the foreign
exchange markets.
These forces are affected
by the international balance of payments and other economic and
financial
conditions, government
intervention, speculation and other factors. The 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 sufficient 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 exchange 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 subject 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 during 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 purchase
transaction," which is the
purchase of a call covering the same underlying 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 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 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 receives 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 expiration date. The Fund
will not
purchase puts if more than 10% of
its
net assets 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%
limitation, 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
Securities
Treasury Bonds and Notes. Because trading interest in U.S.
Treasury bonds and
notes tends to center on
the
most recently auctioned issues, the exchanges will not continue
indefinitely
to introduce new expirations to
replace 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 advance for their potential
exercise
settlement obligations by acquiring
and holding the underlying security. However, if the Fund holds a
long
position 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
representing part ownership of a
pool of mortgage loans. These loans are made by private lenders
and are
either insured by the Federal
Housing Administration 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
options it has written. Should this occur, additional GNMA
Certificates from
the same pool (if obtainable)
or replacement 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
underlying the call options
it
has written.
Other Risks. In the event of a shortage of the underlying
securities
deliverable on exercise of an option, the
Options Clearing Corporation has the authority to permit other,
generally
comparable securities to be
delivered 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 ineligible
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
underlying 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.
government
securities, and exchange
regulations limit the maximum number of options 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 affiliates 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 trading 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 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 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 contract 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 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 that it could
gain rapid market exposure that may offset anticipated increases
in the cost
of securities it intends to
purchase, while continuing to hold higher-yield short-term
securities or
waiting for the long-term market to
stabilize. See "Taxes."
The Appendix contains additional information on the
characteristics and risks
of interest rate futures
contracts.
Options on Futures Contracts. Government Securities Fund also may
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,
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. See
"Options
Activities."
The purchase of call options on interest rate futures contracts is
intended to
serve the same purpose as the
actual purchase of the futures contracts, and the Fund will set
aside cash and
cash equivalents sufficient to
purchase the amount of portfolio securities represented by the
underlying
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 futures 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 securities.
The writing of a put option on a futures contract is similar to
the purchase
of the futures contract, except
that, if the market price declines, the Fund would pay more than
the market
price for the underlying
securities. 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 of 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 options,
the Fund will
comply with rules and
interpretations of the Commodity Futures Trading Commission
("CFTC"), under
which the Fund is
excluded from regulation as a "commodity pool." 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 segregated
account with the custodian (or broker).
The Fund's futures transactions will be entered into for
traditional hedging
purpose - 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.
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 increase 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 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
disadvantageous from an
investment standpoint. 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 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.
Special Equities Fund
The investment objective of Special Equities Fund is long-term
capital
appreciation. 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
warrants),
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 companies 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 established 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
("illiquid securities") will be
acquired if such acquisition would cause the aggregate 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 assets 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
agreements
with respect to, corporate
bonds, U.S. government securities, commercial 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 -
Lending 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 undertaking
are not fundamental policies of the Fund and may be changed by the
Board of
Directors without the vote of
shareholders. Special Equities Fund may also sell securities
"short against
the box," in accordance with the
description set forth above. The Fund may also purchase ADRs.
Investors should realize that the very nature of investing in
smaller, newer
companies involves greater risk
than is customarily associated with investing in larger, more
established
companies. Smaller, newer
companies often have limited product lines, markets or financial
resources,
and they may be dependent for
management upon one of a few key persons. The securities 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 objective
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 general
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.
Growth Opportunity Fund
The investment objective of the Growth Opportunity Fund is capital
appreciation. It seeks to achieve this
objective by investing in securities believed to have above
average potential
for capital appreciation.
The Fund invests principally in common stocks and SBMFM uses a
flexible
management style to select
what
it believes to be unusually attractive growth investments on an
individual
company basis. Such securities
will
typically be issued by small capitalization companies, larger
companies with
established records of growth
in
sales or earnings, and companies with new products, services or
processes.
The Fund may also invest in
companies in cyclical industries during periods when their
securities appear
overly depressed and therefore
attractive for capital appreciation. In addition to common stocks
of
companies, the Fund may invest in
securities convertible into or exchangeable for common stocks,
such as
convertible preferred stocks or
convertible debentures, and warrants.
Repurchase Agreements. The Fund may enter into repurchase
agreement
transactions with domestic banks
or broker-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. 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, 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.
Options, Futures Contracts and Related Options. The Fund expects
to utilize
options, futures contracts
and
options thereon in several different ways, depending upon the
status of the
Fund's portfolio and SBMFM's
expectations concerning the securities markets. The purchase and
sale of
options and futures contracts
involve risks different from those involved with direct
investments in
securities. If SBMFM is not
successful
in utilizing options, futures contracts and similar instruments,
which may be
advantageous to the Fund, the
Fund's performance will be worse than if the Fund did not make
such
investments. The Fund may write or
purchase options in privately negotiated transactions ("OTC
Options") as well
as listed options. OTC
Options can be closed out only by agreement with the other party
to the
transaction. Any OTC Option
purchased by the Fund will be considered an illiquid security.
Any OTC Option
written by the Fund will
be
with a qualified dealer pursuant to an agreement under which the
Fund may
repurchase the option at a
formula price. Such options will be considered illiquid to the
extent that
the formula price exceeds the
intrinsic value of the option. The Fund may not purchase or sell
options,
futures contracts or related
options
for which the aggregate initial margin and premiums exceed 5% of
the fair
market value of the fund's
assets. In order to prevent leverage in connection with the
purchase of
futures contracts thereon by the
Fund, an amount of cash or cash equivalents of liquid high grade
debt
securities equal to the market value
of
the obligation under the futures contracts (less any related
margin deposits)
will be maintained in a
segregated account with the Fund's custodian. The Fund may not
invest more
than 10% of its net assets in
illiquid securities and repurchase agreements which have a
maturity of longer
than seven days.
There are several risks connected with the use of futures
contracts. Such
risks include the imperfect
correlation between movements in the price of the futures
contracts and of the
underlying securities, the risk
of market distortion, the illiquidity risk and the risk of error
in
anticipating price movement.
The Fund may lend its portfolio securities in accordance with the
description
set forth under "Investment
Grade Bond Fund - Lending of Portfolio Securities" above. The
Fund's
investments in warrants are
subject to the same undertaking applicable to Investment Grade
Bond Fund, as
described above.
Managed Growth Fund
The investment objective of the Managed Growth Fund is long term
growth of
capital. The Fund attempts
to
achieve its objective by investing primarily in common stocks and
securities,
including debt securities
which
are convertible into common stock and which are currently price
depressed,
undervalued or out of favor.
Such securities might typically be valued at the low end of their
52 week
trading range.
Covered Option Writing. The Fund may write covered call options
with respect
to its portfolio securities.
The Fund realizes a fee (referred to as a "premium") for granting
the rights
evidenced by the options. A
call
option embodies the right of its purchaser to compel the writer of
the option
to sell to the option holder an
underlying security at a specified price at any time during the
option period.
Thus, the purchaser of a call
option written by the Fund has the right to purchase from the Fund
the
underlying security owned by the
Fund at the agreed-upon price for a specified time period.
Upon the exercise of a call option written by the Fund, the Fund
may suffer a
loss equal to the excess of the
security's market value at the time of the option exercise over
the Fund's
cost of the security, less the
premium received for writing the option.
The Fund will write only covered options with respect to its
portfolio
securities. Accordingly, whenever the
Fund writes a call option on its securities, it will continue to
own or have
the present right to acquire the
underlying security for as long as it remains obligated as the
writer of the
option. To support its obligation
to purchase the underlying security if a call option is exercised,
the Fund
will either (a) deposit with its
custodian in a segregated account, cash, government securities or
other high
grade debt obligations having
a
value at least equal to the exercise price of the underlying
securities or (b)
continue to own an equivalent
number of puts of the same "series" (that is, puts on the same
underlying
security) with exercise prices
greater than those that it has written (or, if the exercise prices
of the puts
that it holds are less than the
exercise prices of those that it has written, it will deposit the
difference
with its custodian in a segregated
account).
The Fund may engage in a closing purchase transaction to realize a
profit, to
prevent an underlying security
from being called or to unfreeze an underlying security (thereby
permitting
its sale or the writing of a new
option on the security prior to the outstanding option's
expiration). To
effect a closing purchase
transaction,
the Fund would purchase, prior to the holder's exercise of an
option that the
Fund has written, an option of
the same series as that on which the Fund desires to terminate its
obligation.
The obligation of the Fund
under an option that it has written would be terminated by a
closing purchase
transaction, but the Fund
would not be deemed to own an option as a result of the
transaction. There
can be no assurances that the
Fund will be able to effect closing purchase transactions at a
time when it
wishes to do so. To facilitate
closing purchase transactions, however, the Fund ordinarily will
write options
only if a secondary market
for
the options exists on domestic securities exchanges or in the
over-the-counter
market.
Options on Broad-Based Domestic Stock Indexes. The Fund may write
call
options and purchase put
options
on broad-based domestic stock indexes and enter into closing
transitions with
respect to such options.
Options on stock indexes are similar to options on securities
except that,
rather than having the right to take
or make delivery of stock at the specified exercise price, an
option on a
stock index gives the holder the
right
to receive, upon exercise of the option, an amount of cash if the
closing
level of the stock index upon which
the option is based is "in the money." This amount of cash is
equal to the
difference between the closing
level
of the index and the exercise price of the option, expressed in
dollars times
a specified multiple. The writer
of the option is obligated, in return for the premium received, to
make
delivery of this amount. Unlike
stock
options, all settlements are in cash, and gain or loss depends on
price
movements in the stock market
generally rather than price movements in the individual stocks.
The effectiveness of purchasing and writing puts and calls on
stock indexes
depends to a large extent on the
ability of SBMFM to predict the price movement of the stock index
selected.
Therefore, whether the Fund
realizes a gain or loss from the purchase of options on an index
depends upon
movements in the level of
stock
prices in the stock market generally. Additionally, because
exercises of
index options are settled in cash, a
call writer such as the Fund cannot determine the amount of the
settlement
obligations in advance and it
cannot provide in advance for, or cover, its potential settlement
obligations
by acquiring and holding the
underlying securities. When the Fund has written the call, there
is also a
risk that the market may decline
between the time the Fund has a call exercised against it, at a
price which is
fixed as of the closing level of
the index on the date of exercise, and the time the Fund is able
to exercise
the closing transaction with
respect to the long call position it holds.
Restricted and Illiquid Securities. The Fund may invest in
securities which
are not readily marketable as
well as restricted securities not registered under the Securities
Act of 1933,
OTC options and securities that
are otherwise considered illiquid as a result of market or other
factors.
Although it may invest up to 10%
of
its assets in such securities, the Fund does not currently
anticipate
investing more than 5% of its assets in
restricted or illiquid securities. The Fund may invest in
securities eligible
for resale under Rule 144A of the
Securities Act ("Rule 144A securities"). Due to changing market
or other
factors, Rule 144A securities
may
be subject to a greater possibility of becoming illiquid than
registered
securities.
The Fund may enter into repurchase agreements, lend its portfolio
securities,
invest in warrants and enter
into futures contracts and purchase options on futures contracts
all in
accordance with the description of
the
Growth Opportunity Fund set forth above.
Investment Restrictions
The Fund's 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
Prospectuses 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 entered 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.
government or its agencies or
instrumentalities, if immediately after such purchase more than 5%
of the
value of the total assets of
the Fund would be invested in securities of such issuer;
2. Invest in real estate (including real estate limited
partnerships), real estate mortgage loans,
or interests in oil, gas and/or mineral exploration, mineral
leases or
development programs,
provided that this limitation shall not prohibit the purchase of
securities 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
connection with a merger,
consolidation, reorganization, or acquisition or assets. (For
purposes of
this limitation, foreign
banks or their agencies or subsidiaries are not considered
"investment
companies") (the Managed
Growth Fund may purchase the securities of closed-end investment
companies to
the extent
permitted by law);
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
account 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 securities
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 securities 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 deposit 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,
borrowing 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 repurchase agreements;
9. Invest in securities of an issuer which, together with
any
predecessor, 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 securities (for purposes of this restriction,
issuers include
predecessors, sponsors,
controlling persons, general guarantors and originators of
underlying assets);
10. Purchase the securities of an issuer if 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
issuer 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
considered not readily marketable);
12. Purchase the securities of issuers conducting their
principal
business 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 utility
companies (including telephone companies), as a group, nor all
banks, savings
and loan associations
and savings banks, as a group, will be considered a single
industry for
purposes of this limitation,
and (b) there is no such limitation with respect to repurchase
agreements or
to investments in U.S.
government securities or certificates of deposit or bankers'
acceptances
issued by domestic
institutions (but not their foreign branches).
13. 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
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% (33 1/3% in the case of
the Managed
Growth Fund and
the
Growth Opportunity Fund) of their total assets taken at cost or at
market
value, whichever is lower,
and then only from banks as a temporary measure for extraordinary
or emergency
purposes. A
Fund may not mortgage, pledge or in any other manner transfer any
of its
assets as security for any
indebtedness. This restriction shall not prohibit entry into
reverse
repurchase agreements, provided
that a 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 assets
(less its liabilities other than obligations under such
agreements); or
3. Write, purchase or sell puts, calls, straddles,
spreads or any
combinations thereof (the
Managed Growth Fund and the Growth Opportunity Fund each may
purchase puts,
calls, straddles,
spreads and any combination thereof up to 5% of their assets).
Restrictions Applicable to All Funds Except Special Equities Fund,
Growth
Opportunity Fund and
Managed
Growth Fund. The Funds may not:
1. Purchase securities which may not be resold to the
public without
registration under the
Securities Act of 1993, as amended (the "1933 Act"); or
2. Act as an underwriter of securities.
Restrictions Applicable to Special Equities Fund. Special
Equities Fund may
not act as an underwriter of
securities, except that the 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
security if its quality rating is reduced by a rating service
below those
specified.
Brokerage
In selecting brokers or dealers to execute securities transactions
on behalf
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 execution capability of
the broker
or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a
continuing
basis. In addition, each
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 Securities 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 administration
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
transactions 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 securities exchange during a comparable
period of
time." The Board of Directors,
particularly the Independent Directors of the Company (as defined
in the 1940
Act), has adopted
procedures
for evaluating the reasonableness of commissions paid to Smith
Barney and
reviews these procedures
periodically. 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 aggregate 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 Directors has determined that
transactions
for a Fund may be executed
through Smith Barney and other affiliated broker-dealers if, in
the judgment
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
conditions of exemptive rules or orders promulgated by the SEC.
Pursuant to
conditions set forth in rules
of
the SEC, the Company may purchase securities 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:
Fiscal Year
Ended
December 31,
Government
Securities
Fund
Special
Equities
Fund
Managed
Growth
Fund
Growth
Opportunity
Fund
Total Brokerage
Commissions
1993
$717,340
$139,427
N/A
N/A
1994
$686,000
$217,269
N/A
N/A
1995
$164,975
$
$1,077,346
201,706
Commissions paid to Smith
Barney*
1993
$87,550
$16,614
N/A
$N/A
1994
$-
$14,280
N/A
$N/A
1995
$-
$11,052
$140,970
$650
% of Total Brokerage
Commissions paid to
Smith Barney*
1995
$0%
13.1%
$0.3%
% of Total Transactions
Involving Commissions paid
to Smith Barney*
1995
0%
11.1%
13.6%
$0.3%
_____________________
* Includes commissions paid to Shearson Lehman Brothers, the
Company's
distributor prior to Smith
Barney. No commissions were paid an Investment Grade Bond Fund.
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 securities
owned by the Fund during the fiscal year. In determining such
portfolio
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
securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as
considered
advisable in view of prevailing or
anticipated 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
SBMFM, 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 portfolio
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 commission 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 transaction costs.
For the fiscal years ended December 31, 1994 and 1995, the
portfolio turnover
rates were as follows:
Fund
1994
1995
Investment Grade Bond Fund
18%
49%
Government Securities Fund
276%
294%
Special Equities Fund
123%
113%
Managed Growth Fund
- -
6%
Growth Opportunity Fund
- -
0%
Increased portfolio turnover necessarily results in
correspondingly greater
brokerage commissions which
must be paid by the Fund. To the extent that portfolio trading
results in
realization of net short-term
capital
gains, shareholders will be taxed on such gains at ordinary tax
rates (except
shareholders who invest
through
IRAs and other retirement plans which are note 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 research department in
managing the
Funds. Although
investment decisions are made individually for each client, at
times decisions
may be made to purchase or
sell the same 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
considered equitable to each,
with emphasis on purchasing or selling entire orders wherever
possible. In
some cases, this procedure may
adversely affect the price paid or received by a Fund or the size
of the
position obtained or disposed of by
the
Fund.
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges on Class A shares described in the
Prospectuses
apply to purchases made
by
any "purchaser," which defined to include the following: (a) an
individual;
(b) an individual's spouse and
his
or her children purchasing shares for his or her own account; (c)
a trustee or
other fiduciary purchasing
shares for a single trust estate or single fiduciary account; (d)
a pension,
profit-sharing or other employee
benefit plan qualified under Section 401(a) of the 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 of 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
Prospectuses,
apply to any purchase of Class
A shares if the aggregate investment of any purchaser 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 is $25,000 or
more. The
reduced sales charge is subject
to
confirmation of the shareholder's holdings through a check of
appropriate
records. Each Fund reserves the
right to terminate or amend the combined right of accumulation at
any time
after 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 public
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
investment. The public offering price
for a Class B share and Class C share, and Class A share
purchases, including
applicable right of
accumulation, equaling or exceeding $500,000, is equal to the net
asset value
per share at the time of
purchase and no sales charge is imposed at the time of purchase.
A contingent
deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class B
shares, Class
C shares, and Class A
shares
when purchased in amounts equaling 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 Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a)
for any period during
which the NYSE is closed (other than for customary weekend and
holiday
closings), (b) when trading in
markets a Fund normally utilizes is restricted, or an emergency as
determined
by the SEC exists, so that
disposal of the Fund's investments or determination of net asset
value is not
reasonably practicable or (c)
for
such other periods as the SEC by order may permit for the
protection of the
Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Company determines that it would
be
detrimental to the best interests of the
remaining shareholders of a Fund to make a redemption payment
wholly in cash,
the Fund may pay, in
accordance with the SEC rules, any portion of a redemption in
excess of the
lesser of $250,000 or 1% of
the
Fund's net assets by a distribution in kind of portfolio
securities in lieu of
cash. 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
$100 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. To
the
extent withdrawals exceed dividends, distributions and
appreciation of a
shareholder's investment in a
Fund,
there will be a reduction in the value of the shareholder's
investment and
continued withdrawal payments
may reduce the shareholder's investment and ultimately exhaust it.
Withdrawal
payments should not be
considered as income from investment in the Fund. Furthermore, as
it
generally would not be advantageous
to a shareholder to make additional investments in the Fund at the
same time
that he or she is participating
in the Withdrawal Plan, purchases by such shareholders in amounts
of less than
$5,000 will not ordinarily
be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and
who hold their
shares in certificate form
must deposit their share certificates with FDISG as agent for
Withdrawal Plan
members. All dividends and
distributions on shares in the Withdrawal Plan are automatically
reinvested at
net asset value in additional
shares of the Company. Withdrawal Plans should be set up with a
Smith Barney
Financial Consultant. A
shareholder who purchases shares directly through FDISG may
continue to do so
and applications for
participation in the Withdrawal Plan must be received by FDISG no
later than
the eighth day of the month
to be eligible for participation beginning with that month's
withdrawal. For
additional information,
shareholders should contract a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as 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
July 27, 1995.
PFS serves as one of the Company's distributor with respect to the
Growth
Opportunity Fund and
Investment Grade Bond Fund pursuant to a Distribution Agreement
dated April
30, 1995.
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 invest the funds in a
Smith Barney money market fund, the amount of the investment will
be included
as part of the average
daily
net assets of both the 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
assets.
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, 1995, Smith Barney incurred
distribution expenses totaling
approximately $11,061,000, consisting of approximately $859,613
for
advertising, $62,541 for printing
and
mailing of Prospectuses, $7,600,893 for support services,
$2,099,171 to Smith
Barney Financial
Consultants,
and $438,783 in accruals for interest on the excess 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 expense it
bears under the Distribution
Agreement, the Company has adopted a services and distribution
plan (the
"Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, each Fund pays Smith Barney
and, with
respect to the Class A and
Class B shares of Growth Opportunity Fund and Investment Grade
Bond Fund, PFS
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 Barney,
and
PFS, with respect to the Class A and Class B shares of Growth
Opportunity Fund
and Investment Grade
Bond Fund, a distribution fee with respect to the Class B and
Class C shares
primarily intended to
compensate Smith Barney and/or PFS for its initial expense of
paying 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 Special Equities Fund, Managed
Growth Fund and
Growth Opportunity
Fund, and 0.50% of the value of average daily net assets
attributable 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 Securities
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
predecessor).
Class A
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 110,683
$ 114,571
$ 181,000
Government Securities Fund
48,964
66,217
63,000
Special Equities Fund
172,978
186,104
347,000
Managed Growth Fund
- -
-
5,400,000
Growth Opportunity Fund
- -
- -
18,000
CDSC (paid to Smith Barney or Shearson Lehman Brothers, its
predecessor).
Class B
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 498,515
$ 556,007
$ 541,000
Government Securities Fund
820,619
629,700
512,000
Special Equities Fund
73,089
288,013
379,000
Managed Growth Fund
- -
- -
174,000
Growth Opportunity Fund
- -
- -
- -
Service Fees
Class A
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 16,729
$ 147,152
$ 505,094
Government Securities Fund
13,628
334,848
1,212,522
Special Equities Fund
22,380
147,488
286,910
Managed Growth Fund
- -
- -
189,955
Growth Opportunity Fund
- -
- -
63,606
Class B
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 1,181,850
$ 922,038
$ 638,293
Government Securities Fund
2,384,061
1,505,763
419,433
Special Equities Fund
226,964
329,007
283,978
Managed Growth Fund
- -
- -
351,874
Growth Opportunity Fund
- -
- -
34,096
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 148
$ 1,009
$ 5,068
Government Securities Fund
255
967
2,078
Special Equities Fund
281
1,975
8,675
Managed Growth Fund -
- -
47,170
Growth Opportunity Fund
- -
- -
23
Distribution Fees
Class B
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 2,363,700
$ 1,844,077
$ 1,276,588
Government Securities Fund
4,768,122
3,011,526
838,868
Special Equities Fund
680,894
987,022
851,933
Managed Growth Fund
- -
- -
1,055,621
Growth Opportunity Fund
- -
- -
102,289
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended 12/31/93
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Investment Grade Bond Fund
$ 295
$ 1,958
$ 9,124
Government Securities Fund
510
1,893
3,741
Special Equities Fund
281
5,927
26,026
Managed Growth Fund
- -
- -
141,508
Growth Opportunity Fund
- -
- -
- -
71
Under its terms, the Plan continues from year to year, provided
such
continuance 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 or PFS 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
Independent 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 and
PFS will
provide the Board of Directors
periodic reports of amounts expended under the Plan and the
purpose for which
such expenditures were
made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day,
Monday
through Friday, except days on
which the NYSE is closed. The NYSE currently is scheduled to be
closed on New
Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and
Christmas, and on
the
preceding Friday or subsequent Monday when one of these holidays
falls on a
Saturday or Sunday
respectively. Because of the differences in distribution fees and
Class-
specific expenses, the per share net
asset value of each Class may differ. The following is a
description of the
procedures used by the 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
between the bid and offered
quotations of such currencies against U.S. dollars as last quoted
by any
recognized dealer. If such
quotations
are not available, the rate of exchange will be determined in good
faith by
the Board of Directors. In
carrying out the Board of Director's valuation policies, SBMFM, as
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
securities and short-term investments)
are valued by SBMFM, as 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
investments are valued at the mean
between the quoted bid prices and asked prices. Investments for
which, in the
judgment of the Pricing
Service, there are not readily obtainable market quotations are
carried at
fair value as determine 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 and provided your investment
dealer is authorized to distribute shares of the fund, on the
basis of
relative net asset value per share at the
time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged
for Class A shares of any
of
the other funds, and the sales charge differential, if any, will
be applied.
Class A shares of any fund may
be
exchanged without a sales charge for shares of the funds that are
offered
without a sales charge. Class A
shares of any fund purchased without a sales charge may be
exchanged for
shares sold with a sales charge,
and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares
purchased with a sales charge
may
be exchanged for Class A shares of any of the other funds, and the
sales
charge differential, if any, will be
applied.
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 the
purposes of calculating CDSC rates and conversion periods, will be
deemed to
have been held since the
date
the shares being exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify FDISG of the
investor's prior
ownership of Class A shares of
Smith Barney High Income Fund and the account 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
documents,
shares submitted for exchange
are redeemed at the then-current net asset value and, subject to
any
applicable CDSC, the proceeds are
immediately invested at a price as described above, in shares of
the fund
being acquired. Smith Barney
reserves the right to reject any exchange request. The exchange
privilege may
be modified or terminated at
any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, a Fund may quote its yield or total return in
advertisements or in reports and other
communications to shareholders. The Fund may include comparative
performance
information in
advertising or marketing the Fund's shares. Such performance
information may
include the following
industry and financial publications: Barron's, Business Week, CDA
Investment
Technologies, Inc.,
Changing Times, Forbes, Fortune, Institutional Investor, Investors
Daily,
Money, Morningstar Mutual
Fund
Values, The New York Times, USA Today and The Wall Street Journal.
To the
extent any advertisement
or
sales literature of a Fund describes the expenses or performance
of 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-bcd + 1)6 - 1]
Where:
a =
dividends and interest earned during the period.
b =
expenses accrued for the period (net of reimbursement).
c =
the average daily number of shares outstanding during the period
that
were entitled to receive dividends.
d =
the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a"
in the
formula) on debt obligations
purchased by the Fund at a discount or premium, the formula
generally calls
for amortization of the
discount
or premium; the amortization schedule will be adjusted monthly to
reflect
changes in the market values of
the debt obligations.
Investors should recognize that in periods of declining interest
rates a
Fund's yield will tend to be somewhat
higher than prevailing market rates, and in periods of rising
interest rates,
the Fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the
inflow of
net new money to the Fund from
the continuous sales 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 expected to occur.
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
formula 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 average annual total returns were as follows for the
periods
indicated:
Name of Fund
Year Ended
December 31, 1995
Inception*
Through December 31, 1995
Investment Grade Bond Fund
29.24%
12.23%
Government Securities Fund
9.37%
6.16%
Special Equities Fund
55.31%
27.30%
Managed Growth Fund
(3.54%)
(3.54%)
Growth Opportunity Fund
(8.91%)
(14.75%)
__________________
* The funds commenced selling Class A shares on November 6,
1992. The
Managed Growth Fund
and
Growth Opportunity Fund Commenced Selling Class A shares on June
30, 1995 and
July 3, 1995,
respectively.
Performance calculations include the historical return
information
related to the Common Sense II
Aggressive Opportunity Fund of the Common Sense Trust (for the
period from May
3, 1994 through June
30, 1995.
Class B's average annual total returns were as follows for the
periods
indicated:
Name of Fund
Year Ended
December 31,
1995
Five Year
Period Ended
December 31, 1995
Ten Year
Period Ended
December 31, 1995(1)
Investment Grade Bond Fund
34.63
91.08
161.88
Government Securities Fund
12.98
48.05
108.49
Special Equities Fund
62.30
216.93
203.96
Managed Growth Fund
- -
- -
- -
Growth Opportunity Fund
- -
- -
- -
__________________
(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.
If investment advisory, sub-investment advisory, administration
and
distribution fees had not been waived,
Class B's average annual total return for the same periods would
have been the
following:
Name of Fund
Year Ended
December 31,
1995
Five Year
Period Ended
December 31, 1995
Ten Year
Period Ended
December 31, 1995
Investment Grade Bond Fund
N/A
13.71
10.11
Government Securities Fund
N/A
8.02
7.62
Special Equities Fund
N/A
N/A
N/A
Managed Growth Fund
N/A
N/A
N/A
Growth Opportunity Fund (5)
N/A
N/A
N/A
Class C's average annual total returns were as follows for the
periods
indicated:
Name of Fund
One Year
Period Ended
12/31/95
Inception
Through 12/31/95
Investment Grade Bond Fund(1)
33.73%
11.04%
Government Securities Fund(2)
12.93%
5.97%
Special Equities Fund(3)
61.35%
15.48%
Managed Growth Fund
0.16%
Growth Opportunity Fund (5)
7.69%
__________________
(1) The Fund commenced selling Class C shares on February 26,
1993.
(2) The Fund commenced selling Class C shares on February 4,
1993.
(3) The Fund commenced selling Class C shares on October 18,
1993.
(4) The Fund commenced selling Class C shares on June 30, 1995.
(5) The Fund commenced selling Class C shares on July 3, 1995.
Aggregate Total Return
Aggregate total return figures, as described below, represent the
cumulative
change in the value of an
investment in the Class of the specified period and are computed
by the
following formula:
ERV-P
P
AGGREGATE TOTAL RETURN = P
Where:
P =
a hypothetical initial payment of $1,000.
ERV =
Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of a 1-, 5- or 10-year period (a fractional
portion thereof) at the end of the 1-5- or 10- year period (or
fractional portion thereof), assuming reinvestment of all
dividends
and distributions.
Class A's aggregate total returns were as follows for the periods
indicated:
Name of Fund
One Year
Period Ended
December 31,
1995**
Five Year
Period
Ended
December 31,
1995**
Ten Year
Period Ended
December 31,
1995***
Period From
Inception
through
December 31,
1995***
Investment Grade Bond
Fund
29.24%
N/A
N/A
43.85%
Government Securities Fund
9.37%
47.05%
108.49%
162.67%
Special Equities Fund
57.30%
215.93%
203.96%
338.67%
Managed Growth Fund
N/A
N/A
N/A
(3.54)%
Growth Opportunity Fund
141.61%
N/A
8.91%
__________________
* The Investment Grade fund, Government Securities Fund, and
Special
Equities Fund commenced
selling
Class A shares on November 6, 1992. The Managed Growth Fund and
Growth
Opportunity Fund
commenced selling Class A shares on June 30, 1995 and July 3,
1995,
respectively.
** Figures do not include the effect of the maximum sales
charge.
*** Figures include the effect of the maximum sales charge.
Performance calculations include the historical return
information
related to the Common Sense II
Aggressive Opportunity Fund of the Common Sense Trust (for the
period from May
3, 1994 through June
30, 1995.
Class B's aggregate total returns were as follows for the periods
indicated:
Name of Fund
One Year
period Ended
December 31,
1995*
Five Year
Period Ended
December 31,
1995*
Ten Year
Period Ended
December 31,
1995*
One Year
Period Ended
December 31,
1995**
Five Year
Period Ended
December 31,
1995**
Ten Year
Period Ended
December 31,
1995**(1)
Investment Grade
Bond Fund
34.63%
91.08%
161.88%
30.13%
90.08%
408.54%
Government
Securities Fund
12.98%
48.05%
108.49%
8.48%
47.05%
108.49%
Special Equities
Fund
62.30%
216.93%
203.96
57.30%
215.93%
203.96%
Managed Growth
Fund
N/A
N/A
N/A
N/A
N/A
N/A
Growth
Opportunity
Fund
N/A
N/A
N/A
N/A
N/A
N/A
__________________
* Figures do not include the effect of the CDSC (maximum 4.50%
for
Investment 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,
1995 would
be different than that
reflected above.
Performance calculations include the historical return
information
related to the Common Sense II
Aggressive Opportunity Fund of the Common Sense Trust (for the
period from May
3, 1994 through June
30, 1995.
Class C's aggregate total returns were as follows for the periods
indicated:
Name of Fund
One Year
Period Ended
December 31,
1995**
Period from
Inception
through
December 31,
1995**
Investment Grade Bond
Fund
34.74%
34.69%
Government Securities Fund
12.93%
18.34%
Special Equities Fund
61.35%
37.29%
Managed Growth Fund
N/A
0.16%
Growth Opportunity Fund
N/A
7.69%
__________________
* Investment Grade Bond Fund, Government Securities Fund,
Special Equities
Fund, Managed
Growth
Fund and Growth Opportunity Fund commenced selling Class C shares
on February
26, 1993, February
4, 1993 October 18, 1993, June 30, 1995 and July 3, 1995,
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%)
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 operating
expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance
quotation should not be considered representative of the Class'
performance
for any specified period in the
future. Because performance will vary, it may not provide a basis
for
comparing an investment in the
Class
with certain bank deposits or other investments that pay a fixed
yield for a
stated period of time. Investors
comparing the Class' performance with that of other mutual funds
should give
consideration to the quality
and maturity of the respective investment companies' portfolio
securities.
TAXES
The following is a summary of certain Federal income tax
considerations that
may affect the Company and
its shareholders. The summary is not intended 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 continue
to qualify separately each
year as a "regulated investment company" under the Code. A
qualified Fund
will not be liable for Federal
income taxes to the extent that its taxable net investment income
and net
realized capital gains are
distributed to its shareholders, provided that each Fund
distributes at least
90% of its net investment
income.
Each fund intends to accrue dividend income for Federal income tax
purposes in
accordance with the rules
applicable to regulated investment companies. In some cases,
these rules may
have the effect of
accelerating
(in comparison to other recipients of the dividend) the time at
which the
dividend 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 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 ordinary 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
unrealized
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 include "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 general, 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 then three
months, which
applies to regulated investment
companies, may restrict a Fund in the amount of hedging
transactions which it
may undertake. 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
effected straddle positions will be
determined under rules that vary according to the election(s)
made. Because
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 policy, it is expected
that
dividends from domestic corporations
will constitute a portion of the gross income of several of the
Funds but not
of others. 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 deduction
for
corporations.
Distributions of net realized capital gains designated by a Fund
as capital
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
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.
All dividends are taxable to the shareholder whether reinvested in
additional
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
foreign currency and the time a Fund actually collects such
receivables or
pays such liabilities, generally
are
treated as ordinary income or ordinary loss. Similarly, on
disposition of
debt securities denominated in a
foreign currency and on disposition of 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 company taxable income to be distributed to its
shareholders as
ordinary income.
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
consists
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 shareholders. 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, shareholders will be required to include
as income
their proportionate share of the
amount of foreign taxes paid or accrued by the Fund and generally
be entitled
to claim either a credit or
deduction (as an itemized deduction) 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
fluctuation
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
separately 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 accrued by a Fund. A foreign tax
credit can
be used to offset only 90% of
the
alternative minimum tax (as computed under the Code for purposes
of the
limitation) imposed on
corporations and individuals. If a Fund is not eligible to make
the election
to "pass through" to its
shareholders its foreign taxes, the foreign taxes it pays will
reduce
investment company taxable income and
the distributions by that Fund will be treated as United States
source income.
The foregoing is only a general description of the foreign tax
credit.
Because application of the credit
depends on the particular circumstances of each shareholder,
shareholders are
advised to consult their own
tax advisors.
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 forthcoming distribution but the
distribution
generally would be taxable to him.
Upon redemption, sale or exchange of his shares, a shareholder
will realize 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
distributions or otherwise)
within a period of 61 days beginning 30 days before 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
disallowed 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 investment 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
eligible to elect to include in its gross income its share of
earnings of a
passive foreign investment company
on a current basis. Generally the election 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
annually as a regulated investment company may limit its elections
with
respect 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
passive foreign investment company shares, as well as subject a
Fund itself to
tax on certain income from
such shares, the amount that must be distributed to shareholders,
and which
will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or
decreased
substantially 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 Company,
(b) disposes of those shares
within 90 days and (c) acquires shares in a mutual fund for which
the
otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., exchange
privilege), the
original sales charge increases the
shareholder's tax basis in the original shares only to the extent
the
otherwise applicable sales charge for the
second acquisition is not reduced. The portion of the original
sales charge
that does not increase the
shareholder's tax basis in the original shares would be treated as
incurred
with respect to the second
acquisition and, as a general rule, would increase the
shareholder's tax basis
in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the
newly acquired
shares made within 90 days
of
subsequent acquisition. This provision prevents a shareholder
from
immediately deducting 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
identification number and that he or she is not subject to such
withholding,
then the shareholder may be
subject to a 31% "backup withholding tax" with respect to (a) any
taxable
dividends and distributions and
(b) any proceeds of any redemption of Company shares. An
individual's
taxpayer identification number is
his or her social security number. The backup withholding tax is
not an
additional tax and may be credited
against a shareholder's regular federal income tax liability.
The foregoing discussion relates only to Federal income tax law as
applicable
to the 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 income
tax treatment. The
Government
Securities Fund's dividends, to the extent they consist of
interest from
obligations of the United States
government and certain of its agencies and instrumentalities, may
be exempt
from state and local income
taxes in some jurisdictions. The Company intends to advise
shareholders of
the proportion of that Fund's
dividends which are derived from such 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 December 29, 1988, July
30, 1993 and
October 28, 1994, to
SLH
Investment Portfolios Inc., Smith Barney Shearson Investment Funds
Inc., and
Smith Barney Investment
Funds, Inc., respectively.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania
19103, serves as the
custodian
of the Company. Under its custody agreement with the Company, PNC
Bank holds
the Company's fund
securities and keeps all necessary accounts and records. For its
services,
PNC Bank receives a monthly fee
based upon the month-end market value of securities held in
custody and also
receives transaction charges.
PNC bank 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
foreign banks and securities
depositories. The assets of the Company are held under bank
custodianship in
compliance with the 1940
Act.
FDISG is located at Exchange Place, Boston, Massachusetts 02109,
and serves as
the Company's transfer
agent. For these services, FDISG receives a monthly fee computed
on the basis
of the number of
shareholder
accounts it maintains of 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, 1995
accompany this Statement
of
Additional Information and are incorporated herein by reference in
their
entirety.
APPENDIX
Corporate Bonds and Commercial Paper Ratings
Corporate Bonds. Bonds rated Aa by Moody's are judged by Moody's
to be of
high-quality by all
standards.
Together with bonds rated Aaa (Moody's highest rating) they
comprise what are
generally known as high-
grade bonds. Aa bonds are rated lower than Aaa bonds because
margins of
protection may not be as large
as those of Aaa bonds, or fluctuation of protective elements may
be of greater
amplitude, or there may be
other elements present which make the long-term risks appear
somewhat larger
than 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 interest 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
protective elements may be lacking or may be characteristically
unreliable
over any great length of time.
Such bonds lack outstanding investment characteristics and, in
fact, have
speculative characteristics as
well.
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
protection 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 between
definitely sound
obligations and those where speculative elements begin to
predominate. These
bonds have adequate asset
coverage and normally 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 qualifies 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 appraisal of speculative-
type risks which may be inherent in certain areas; (c) evaluation
of the
issuer's products in relation to
competition and customer acceptance; (d) liquidity; (e) amount and
quality of
long-term debt; (f) trend of
earnings over a period of ten years; (g) financial strength of 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 preparations to meet
such
obligations. Issuers within the Prime
category may be given ratings 1, 2 or 3, depending on the relative
strengths
of these factors.
Commercial paper rated A by S&P has the following characteristics:
(a)
liquidity ratios are adequate to
meet cash requirements; (b) long-term senior 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 unquestioned. 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. Treasury 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 required 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 transactions in that
futures
contract initial margin does not involve
the borrowing of funds by their customer to finance the
transaction. Rather,
the initial margin is in the
nature of a performance bond or good faith deposit on the contract
which is
returned to the Fund upon
termination of the futures contract, assuming all contractual
obligations have
been satisfied. Subsequent
payments, 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 terminate 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 delivery
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 realizes the loss.
Similarly, the
closing out of a futures contract
purchase is effected by the Fund entering into a futures contract
sale. If
the offsetting 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 securities 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
contracts,
the Fund may buy or sell
futures contracts in a greater dollar amount of the securities
being hedged if
the historical 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 volatility 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 portfolio may decline. If this
occurred, the
Fund would lose money on the
futures 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 equivalents) in
U.S.
government securities (or options) in an orderly fashion, it is
possible that
the market may decline instead;
if
the Fund then concludes 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
reasons, 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 requirements. Rather than
meeting
additional margin deposit
requirements, investors may close futures contracts though
offsetting
transactions which could distort the
normal relationship between the debt securities and futures
markets; second,
from the point of view of
speculators, the deposit requirements in the futures market are
less onerous
than margin requirements in the
securities market. Therefore, increased participation by
speculators in the
futures market may also cause
temporary price distortions. Due to the possibility of price
distortion in
the futures market and because of
the imperfect correlation between movements in the debt securities
and
movements in the prices of futures
contracts, a correct forecast of interest rate trends by the
investment
advisor may still not result 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. Although Government Securities
Fund
intends to purchase or sell
futures only on exchanges or boards of trade where there appears
to be an
active secondary 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 futures 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 futures
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 investment
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 requirements. 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 futures contracts
described above,
and, in addition, net option
premiums received will be included as initial margin deposits.
In addition to the risks which apply to all options transaction,
there are
several special risks relating to
options on futures contracts. Trading 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 contracts on any exchange unless and until, in the
investment
advisor's opinion, 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 potential
risk to the
Fund because the maximum
amount of risk is the premium paid for the options (plus
transaction costs).
However, there may be
circumstances 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 option on a futures contract involves risks similar to those
arising in the
sale of futures contracts, as
described above.
Smith Barney
Investment Funds Inc.
6
MUTF7X19.DOC 4/29/96 9:41 AM
MUTF7X19.DOC.3 A-3 4/29/96 9:41 AM
STATEMENT OF ADDDITIONAL INFORMATION
OF
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
DATED April 29, 1996
is incorporated by reference to Post Effective Amendment No.20 to
the
Telecommunications Trust Registration Statement on Form N-1A filed
on April
29, 1996. Reference
Numbers 2-86519 and 811-3763
ANNUAL REPORT
OF
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
-------------
ANNUAL REPORT
-------------
1995
1995
1995
1995
1995
Smith Barney
Telecommunications
Growth Fund
---------------------
December 31, 1995
[LOGO] Smith Barney Mutual
Funds
Investing for your
future.
Every day.
<PAGE>
- -------------------------------------------
Smith Barney Telecommunications Growth Fund
- -------------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the period ended
December 31,
1995 for Smith Barney Telecommunications Growth Fund. In this
report, we
briefly
cover the Fund's performance and discuss our outlook for its
current holdings.
A
more detailed summary of performance and holdings can be found in
the
appropriate sections that follow in the annual report.
As you know, the investment management team of Smith Barney
Telecommunications
Growth Fund seeks to provide shareholders with capital growth
through common
stocks and, secondarily, income. The Fund's 1995 annual total
return for Class
A
and Class B shares was 8.54% and 7.67%, respectively. In
comparison, the
Standard & Poor's 500-Stock Price Index (the "S&P 500," a
capitalization-weighted measure of 500 widely held common stocks
listed on the
New York Stock Exchange, American Stock Exchange and over-the-
counter market)
had a total return of 37.53% in 1995.
The Fund's performance in 1995 was disappointing as its stocks in
our primary
area of investment lagged the performance of the U.S. market in
general. We
have
attempted to position the portfolio to benefit from technological
change and
rapid growth that is occurring in the telecommunications industry
worldwide.
Last year, foreign markets were either flat or down and the
domestic market
was
affected by anxiety caused by pending legislative and regulatory
activity in
Washington, D.C.
The telecommunications industry is undergoing unprecedented
change. Major
capital spending plans to enable telephones to provide video, the
wireless
revolution and the explosive growth of the Internet are just some
of the many
factors that have positively impacted the telecommunications
sector. On the
other hand, fears of entry barriers coming down and the
acceleration of
capital
investment requirements have heightened investor concerns.
1
<PAGE>
Our long-term outlook for the telecommunications industry is
positive. A
global
revolution in communications is underway and technological
advances are
fueling
its growth. In order to capitalize on this long-term trend, the
Fund intends
to
target companies that are directly involved in growth areas such
as software,
networking, on-line services and enhancing the power of computers.
Sincerely,
/s/ Heath B. McLendon /s/ Guy R.
Scott
Heath B. McLendon Guy R. Scott
Chairman and Investment
Officer
Chief Executive Officer
January 12, 1996
2
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class A Shares
- ------------------------------------------------------------------
- ------------
- --
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions of
Capital
Returns(1)
==================================================================
=========
======
=====
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $11.91 $12.71 $0.00 $0.21
$0.00
8.54%
- ------------------------------------------------------------------
- ------------
- --------
12/31/94 12.86 11.91 0.13 0.00
0.00
(6.37)
- ------------------------------------------------------------------
- ------------
- --------
12/31/93 9.63 12.86 0.00 0.17
0.00
35.27
- ------------------------------------------------------------------
- ------------
- --------
12/31/92 8.68 9.63 0.02 0.71
0.00
19.41
- ------------------------------------------------------------------
- ------------
- --------
12/31/91 7.36 8.68 0.06 0.14
0.01
20.94
- ------------------------------------------------------------------
- ------------
- --------
12/31/90 8.78 7.36 0.14 0.10
0.00
(13.46)
- ------------------------------------------------------------------
- ------------
- --------
12/31/89 7.08 8.78 0.16 0.82
0.00
37.85
- ------------------------------------------------------------------
- ------------
- --------
12/31/88 6.10 7.08 0.10 0.00
0.00
17.69
- ------------------------------------------------------------------
- ------------
- --------
12/31/87 11.05 6.10 0.69 3.96
0.00
(3.53)
- ------------------------------------------------------------------
- ------------
- --------
12/31/86 12.64 11.05 0.32 3.39
0.00
18.84
==================================================================
=========
======
=====
Total $1.62 $9.50
$0.01
==================================================================
=========
======
=====
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class B Shares
- ------------------------------------------------------------------
- ------------
- --
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions
of Capital
Returns(1)
==================================================================
=========
======
=========
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $11.82 $12.51 $0.00 $0.21
$0.00
7.67%
- ------------------------------------------------------------------
- ------------
- ------------
12/31/94 12.77 11.82 0.03 0.00
0.00
(7.17)
- ------------------------------------------------------------------
- ------------
- ------------
12/31/93 9.63 12.77 0.00 0.17
0.00
34.34
- ------------------------------------------------------------------
- ------------
- ------------
Inception*-12/31/92 9.33 9.63 0.01 0.71
0.00
10.98+
==================================================================
=========
======
=========
Total $0.04 $1.09
$0.00
==================================================================
=========
======
=========
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class C Shares
- ------------------------------------------------------------------
- ------------
- --
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions
of Capital
Returns(1)
==================================================================
=========
======
==========
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $12.00 $12.71 $0.00 $0.21
$0.00
7.73%
- ------------------------------------------------------------------
- ------------
- -------------
Inception*-12/31/94 12.70 12.00 0.03 0.00
0.00
(5.24)+
==================================================================
=========
======
==========
Total $0.03 $0.21
$0.00
==================================================================
=========
======
==========
It is the Fund's policy to distribute dividends and capital
gains, if
any,
annually.
3
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Average Annual Total Return
- ------------------------------------------------------------------
- ------------
- --
Without Sales
Charge(1)
------------------------------
- ------------
- --
Class A Class B
Class C
==================================================================
=========
=====
Year Ended 12/31/95 8.54% 7.67%
7.73%
- ------------------------------------------------------------------
- ------------
- --
Five Years Ended 12/31/95 14.70 N/A
N/A
- ------------------------------------------------------------------
- ------------
- --
Ten Years Ended 12/31/95 12.32 N/A
N/A
- ------------------------------------------------------------------
- ------------
- --
Inception* through 12/31/95 14.17 13.50
1.81
==================================================================
=========
=====
With Sales
Charge(2)
-------------------------------
- ------------
- --
Class A Class B
Class C
==================================================================
=========
=====
Year Ended 12/31/95 3.11% 2.67%
6.73%
- ------------------------------------------------------------------
- ------------
- --
Five Years Ended 12/31/95 13.53 N/A
N/A
- ------------------------------------------------------------------
- ------------
- --
Ten Years Ended 12/31/95 11.74 N/A
N/A
- ------------------------------------------------------------------
- ------------
- --
Inception* through 12/31/95 13.68 13.02
1.81
==================================================================
=========
=====
- ------------------------------------------------------------------
- ------------
- --
Cumulative Total Return
- ------------------------------------------------------------------
- ------------
- --
Without Sales
Charge(1)
==================================================================
=========
=====
Class A (12/31/85 through 12/31/95) 219.53%
- ------------------------------------------------------------------
- ------------
- --
Class B (Inception* through 12/31/95) 49.04
- ------------------------------------------------------------------
- ------------
- --
Class C (Inception* through 12/31/95) 2.08
==================================================================
=========
=====
(1) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value and does not reflect deduction of the
applicable
sales charge with respect to Class A shares or the applicable
contingent
deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value. In addition, Class A shares reflect
the
deduction
of the maximum initial sales charge of 5.00% and Class B
shares reflect
the
deduction of a 5.00% CDSC, which applies if shares are
redeemed less than
one year from initial purchase and declines thereafter by
1.00% per year
until no CDSC is incurred. Class C shares reflect the
deduction of a
1.00%
CDSC, which applies if shares are redeemed within the first
year of
purchase.
* Inception dates for Class A, B and C shares are January 1,
1984, November
6, 1992 and November 7, 1994, respectively.
+ Total return is not annualized, as it may not be
representative of the
total return for the year.
4
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Historical Performance (unaudited)
- ------------------------------------------------------------------
- ------------
- --
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Telecommunications Growth Fund vs.
Standard & Poor's 500 Index, Lipper Science &Technology Fund
Average
and Lipper Growth Fund Index
- ------------------------------------------------------------------
- ------------
- --
December 1985 -- December 1995
[The following table was represented by a line chart in the
printed
material.]
Growth and Income S&P 500 Lipper Growth
Lipper
Science
----------------- ------- -------------
- ------------
- --
12/31/85 9498 10000 10000
10000
12/86 11287 11867 11560
10818
12/87 10889 12490 11931
11284
12/88 12815 14559 13617
12118
12/89 17666 19165 17363
15011
12/90 15287 18569 16424
14894
12/91 18489 24216 22272
21853
12/92 22078 26059 23972
25265
12/93 29865 28678 26844
31679
12/94 27961 29056 26423
36669
12/95 30350 39961 34902
50548
+ Hypothetical illustration of $10,000 invested in Class A
shares on
December
31, 1985, assuming deduction of the maximum 5.00% sales
charge at the
time
of investment and reinvestment of dividends and capital
gains, if any, at
net asset value through December 31, 1995. The Standard &
Poor's 500
Index
is composed of widely held common stocks listed on the New
York Stock
Exchange, American Stock Exchange and the over-the-counter
market.
Figures
for the index include reinvestment of dividends. The Lipper
Science
&Technology Fund Average is composed of the Fund's peer group
of 37
mutual
funds investing within the science and technology investment
objective
category as of December 31, 1995. The Lipper Growth Fund
Index is a net
asset value weighted index of the 30 largest funds within the
Growth
category. The indexes are unmanaged and are not subject to
the same
management and trading expenses as a mutual fund. The
performance of the
Fund's other classes may be greater or less than the Class A
shares'
performance indicated on this chart, depending on whether
greater or
lesser
sales charges and fees were incurred by shareholders
investing in other
classes.
All figures represent past performance and are not a
guarantee of future
results. Investment returns and principal value will
fluctuate, and
redemption value may be more or less than the original cost.
No
adjustment
has been made for shareholder tax liability on dividends or
capital
gains.
5
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Portfolio Highlights (unaudited)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
Portfolio Breakdown
[The following table was represented by a pie chart in the
printed
material.]
Capital Goods 5.1
Communications 28.2
Consumer Services 13.5
Energy 7.6
Technology 16.4
Telecommunications 26.9
Repurchase Agreement 2.3
Top Ten Common Stock Holdings
Percentage of
Total
Investments
==================================================================
=========
=====
Ericsson LM Telephone Co., Class B Shares, ADR
4.1%
MFS Communications Corp.
4.0
MCI Communications Corp.
3.5
General Instruments Corp.
3.0
Motorola Inc.
2.9
Sprint Corp.
2.8
Cellular Communications Inc., Class A Shares
2.6
Tele Communications Inc., Class A Shares
2.5
Tellabs Inc.
2.5
Vodafone Group PLC ADR
2.4
==================================================================
=========
=====
6
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
COMMON STOCKS -- 96.4%
Capital Goods -- 5.1%
285,000 General Instruments Corp.*
$
6,661,875
328,000 Scientific-Atlanta, Inc.
4,920,000
- ------------------------------------------------------------------
- ------------
- --
11,581,875
- ------------------------------------------------------------------
- ------------
- --
Communications -- 28.2%
184,000 AirTouch Communications Inc.*
5,198,000
101,333 Cellular Communications of Puerto Rico, Inc.*
2,811,992
117,500 Cellular Communications Inc., Class A Shares*
5,845,625
130,000 DSC Communications Corp.*
4,793,750
470,000 Ericsson LM Telephone Co., Class B Shares, ADR
9,165,000
92,000 Grupo Televisa, SA ADR
2,070,000
171,200 MFS Communications Co., Inc.*
9,116,400
114,000 Motorola Inc.
6,498,000
206,000 NEXTEL Communications Inc., Class A Shares*
3,038,500
107,000 Nokia Corp. ADR
4,159,625
81,500 Rogers Cantel Mobile Communications, Inc.,
Class B Shares*
2,159,750
150,000 Tellabs Inc.*
5,550,000
163,500 Vanguard Cellular Systems Inc., Class A Shares*
3,310,875
- ------------------------------------------------------------------
- ------------
- --
63,717,517
- ------------------------------------------------------------------
- ------------
- --
Consumer Services -- 13.5%
200,000 Bell Cablemedia PLC, ADR*
3,200,000
45,000 CMG Information Services Inc.*
4,179,375
218,700 Comcast Corp., Class A Shares
3,854,587
109,350 Comcast Corp., Class A Shares Special
1,988,803
100,000 Comcast UK Cable Partners Ltd.*
1,250,000
16,800 Grupo Iusacell, SA ADR, Series D*
134,400
134,200 Grupo Iusacell, SA ADR, Series L*
1,358,775
50,000 NYNEX Cable Communications Group A*
868,750
28,000 Peoples Choice TV Corp.*
532,000
83,350 Tele-Communications Liberty-Media, Class A
Shares*
2,240,031
283,400 Tele-Communications Inc., Class A Shares*
5,632,575
134,500 Time Warner, Inc.
5,094,187
- ------------------------------------------------------------------
- ------------
- --
30,333,483
- ------------------------------------------------------------------
- ------------
- --
Energy -- 7.6%
530,000 Global Marine Inc.*
4,637,500
337,000 Rowan Companies, Inc.*
3,327,875
64,200 Schlumberger, Ltd.
4,445,850
142,000 Varco International, Inc.*
1,704,000
105,000 Weatherford International, Inc.*
3,031,875
- ------------------------------------------------------------------
- ------------
- --
17,147,100
- ------------------------------------------------------------------
- ------------
- --
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments (continued)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
Technology -- 16.4%
130,000 Alpha Industries Inc.*
$
1,836,250
128,000 Anadigics, Inc.*
2,720,000
100,000 Analog Devices Inc.*
3,537,500
67,000 FTP Software Inc.*
1,943,000
53,000 Hewlett-Packard Co.
4,438,750
67,000 Inso Corp.*
2,847,500
60,000 McAfee Asssociates Inc.*
2,632,500
65,000 Newbridge Networks Corp.*
2,689,375
185,000 Softkey International Inc.*
4,278,125
135,000 Symantec Corp.*
3,138,750
111,300 3Com Corp.*
5,189,363
120,000 Triquint Semiconductors Inc.*
1,620,000
- ------------------------------------------------------------------
- ------------
- --
36,871,113
- ------------------------------------------------------------------
- ------------
- --
Telecommunications -- 25.6%
114,000 C-TEC Corp., Class B Shares
3,477,000
302,700 MCI Communications Corp.
7,908,038
100,000 Nera AS ADR*
3,250,000
100,000 Panamsat Corp.*
2,206,250
70,000 Perusahaan Perseroan Indonesian Satellite ADR
2,555,000
158,550 Sprint Corp.
6,322,181
100,000 Tele Danmark A/S, Class B Shares ADR
2,762,500
41,500 Telecom Corporation Argentina Stet-France ADR
1,976,438
52,900 Telecom Corporation New Zealand Ltd. ADR
3,669,937
40,000 TelecomAsia Corporation Pub. Ltd.*+
1,205,000
81,000 Telecommunication Brasileiras ADR*
3,837,375
73,000 Telefonica de Argentina, SA ADR, Class B Shares
1,989,250
62,000 Telefonica de Espana, SA ADR
2,596,250
110,200 Telefonos de Mexico, SA ADR
3,512,625
476,000 Telekom Malaysia
3,712,012
270,000 Thai Telephone & Communication Public Co. Ltd.*
1,468,440
152,000 Vodafone Group PLC ADR
5,358,000
- ------------------------------------------------------------------
- ------------
- --
57,806,296
- ------------------------------------------------------------------
- ------------
- --
TOTAL COMMON STOCKS
(Cost -- $203,132,859)
217,457,384
==================================================================
=========
=====
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments (continued)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
PREFERRED STOCK -- 1.3%
Telecommunications -- 1.3%
57,000 Philippine Long Distance Telephone Co.
Series III $3.50 (Cost -- $2,850,000)
$
2,964,000
==================================================================
=========
=====
FACE
AMOUNT SECURITY
VALUE
==================================================================
=========
=====
REPURCHASE AGREEMENT -- 2.3%
$5,231,000 Chemical Securities Inc., 5.80% due 1/2/96
Proceeds at maturity -- $5,234,370;
(Fully collateralized
by U.S. Treasury Notes, 6.125% due 5/31/97;
Market value -- $5,335,758) (Cost -- $5,231,000)
5,231,000
==================================================================
=========
=====
TOTAL INVESTMENTS -- 100%
(Cost -- $211,213,859)++
$225,652,384
==================================================================
=========
=====
* Non-income producing security.
+ Security exempt from registration under Rule 144A of
Securities Act of
1933. These securities may be resold in transactions exempt
from
registration, generally to qualified institutional buyers.
++ Aggregate cost for Federal income tax purposes is
substantially the same.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Statement of Assets and Liabilities
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
ASSETS:
Investments, at value (Cost -- $211,213,859)
$225,652,384
Receivable for securities sold
6,486,528
Receivable for Fund shares sold
180,055
Dividend and interest receivable
281,533
- ------------------------------------------------------------------
- ------------
- --
Total Assets
232,600,500
==================================================================
=========
=====
LIABILITIES:
Payable for securities purchased
4,510,777
Payable for Fund shares purchased
315,622
Distribution fees payable
149,504
Payable to bank
146,970
Investment advisory fees payable
107,406
Administration fees payable
39,057
Accrued expenses and other liabilities
95,645
- ------------------------------------------------------------------
- ------------
- --
Total Liabilities
5,364,981
==================================================================
=========
=====
Total Net Assets
$227,235,519
==================================================================
=========
=====
NET ASSETS:
Par value of shares of beneficial interest
$
18,074
Capital paid in excess of par value
204,184,916
Accumulated net realized gain from security transactions
8,594,004
Net unrealized appreciation of investments
14,438,525
- ------------------------------------------------------------------
- ------------
- --
Total Net Assets
$227,235,519
==================================================================
=========
=====
Shares Outstanding:
Class A
5,590,074
- ------------------------------------------------------------------
- ------------
- --
Class B
12,409,796
- ------------------------------------------------------------------
- ------------
- --
Class C
75,121
- ------------------------------------------------------------------
- ------------
- --
Net Asset Value:
Class A (and redemption price)
$12.71
- ------------------------------------------------------------------
- ------------
- --
Class B*
$12.51
- ------------------------------------------------------------------
- ------------
- --
Class C**
$12.71
- ------------------------------------------------------------------
- ------------
- --
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net aset value per share)
$13.38
==================================================================
=========
=====
* Redemption price is NAV of Class B shares reduced by a 5.00%
CDSC if
shares
are redeemed less than one year from initial purchase (See
Note 2).
* Redemption price is NAV of Class C shares reduced by a 1.00%
CDSC if
shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Statement of Operations For the Year Ended
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
INVESTMENT INCOME:
Dividends
$
2,280,672
Interest
551,582
Less:Foreign withholding tax
(190,719)
- ------------------------------------------------------------------
- ------------
- --
Total Investment Income
2,641,535
==================================================================
=========
=====
EXPENSES:
Investment advisory fees (Note 2)
1,393,007
Distribution fees (Note 2)
1,941,865
Administration fees (Note 2)
506,548
Shareholder and system servicing fees
431,493
Registration fees
90,000
Shareholder communications
50,000
Custody
41,096
Audit and legal
39,100
Trustees' fees
18,000
Other
23,915
- ------------------------------------------------------------------
- ------------
- --
Total Expenses
4,535,024
- ------------------------------------------------------------------
- ------------
- --
Net Investment Loss
(1,893,489)
==================================================================
=========
=====
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCIES (NOTE3):
Realized Gain From:
Security transactions (excluding short-term securities)
21,752,822
Foreign currency transactions
633
- ------------------------------------------------------------------
- ------------
- --
Net Realized Gain
21,753,455
- ------------------------------------------------------------------
- ------------
- --
Change in Net Unrealized Appreciation of Investments:
Beginning of year
15,076,522
End of year
14,438,525
- ------------------------------------------------------------------
- ------------
- --
Decrease in Net Unrealized Appreciation
(637,997)
- ------------------------------------------------------------------
- ------------
- --
Net Gain on Investments and Foreign Currencies
21,115,458
- ------------------------------------------------------------------
- ------------
- --
Increase in Net Assets From Operations
$19,221,969
==================================================================
=========
=====
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Statements of Changes in Net Assets For the Years
Ended December
31,
- ------------------------------------------------------------------
- ------------
- --
1995
1994
==================================================================
=========
=====
OPERATIONS:
Net investment loss $ (1,893,489)
$
(2,329,471)
Net realized gain (loss) 21,753,455
(5,848,735)
Decrease in net unrealized appreciation (637,997)
(10,566,252)
- ------------------------------------------------------------------
- ------------
- --
Increase (Decrease) in Net Assets
From Operations 19,221,969
(18,744,458)
- ------------------------------------------------------------------
- ------------
- --
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
(1,451,297)
Net realized gains (3,980,765)
- --
- ------------------------------------------------------------------
- ------------
- --
Decrease in Net Assets From
Distributions to Shareholders (3,980,765)
(1,451,297)
- ------------------------------------------------------------------
- ------------
- --
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 24,781,672
112,458,875
Net asset value of shares issued for reinvestment
of dividends 3,764,024
1,345,277
Cost of shares reacquired (86,600,793)
(57,903,959)
- ------------------------------------------------------------------
- ------------
- --
Increase (Decrease) in Net Assets From
Fund Share Transactions (58,055,097)
55,900,193
- ------------------------------------------------------------------
- ------------
- --
Increase (Decrease) in Net Assets (42,813,893)
35,704,438
NET ASSETS:
Beginning of year 270,049,412
234,344,974
- ------------------------------------------------------------------
- ------------
- --
End of year $227,235,519
$270,049,412
==================================================================
=========
=====
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements
- ------------------------------------------------------------------
- ------------
- --
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Telecommunications Growth Fund ("Fund"), a
separate
investment fund of the Smith Barney Telecommunications Trust
("Trust"), a
Massachusetts business trust, is registered under the Investment
Company Act
of
1940, as amended, as a non-diversified, open-end management
investment
company.
The Trust consists of the Fund and one other separate investment
fund, the
Smith
Barney Telecommunications Income Fund. The financial statements
and financial
highlights for the other fund are presented in a separate annual
report.
The significant accounting policies consistently followed by
the Fund
are:
(a) securities transactions are accounted for on trade date; (b)
securities
traded on national securities markets are valued at the closing
prices on such
markets; securities for which no sales price were reported are
valued at the
current quoted bid prices; (c) short-term investments that have a
maturity of
more than 60 days are valued at prices based on market quotations
for
securities
of similar type, yield and maturity; (d) short-term investments
and securities
maturing within 60 days are valued at cost plus accreted discount,
or minus
amortized premium, as applicable; (e) dividend income is recorded
on ex-
dividend
date and interest income is recorded on the accrual basis; (f)
gains or losses
on the sale of securities are calculated using the specific
identification
method; (g) the accounting records are maintained in U.S. dollars.
All assets
and liabilities denominated in foreign currencies are translated
into U.S.
dollars based on the rate of exchange of such currencies against
U.S. dollars
on
the date of valuation. Purchases and sales of securities, and
income and
expenses are translated at the rate of exchange quoted on the
respective date
that such transactions are recorded. Differences between income
and expense
amounts recorded and collected or paid are adjusted when reported
by the
custodian bank; (h) direct expenses are charged to each fund and
each class;
management fees and general fund expenses are allocated on the
basis of
relative
net assets; (i) the Fund intends to comply with the applicable
provisions of
the
Internal Revenue Code of 1986, as amended, pertaining to regulated
investment
companies and to make distributions of taxable income sufficient
to relieve it
from substantially all Federal income and excise taxes; (j) the
character of
income and gains to be distributed are determined in accordance
with income
tax
regulations which may differ from generally accepted accounting
principles. At
December 31, 1995, reclassifications are made to the Fund's
capital accounts
to
reflect premanent book/tax differences and income and gains
available for
distributions under income tax regulations. Accordingly, a portion
of
accumulated net investment loss amounting to $220,713 has been
reclassified to
paid-in capital. Net investment income, net realized gains
13
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
and net assets were not affected by this change; and (k) estimates
and
assumptions are required to be made regarding assets, liabilities
and changes
in
net assets resulting from operations when financial statements are
prepared.
Changes in the economic environment, financial markets and any
other
parameters
used in determining these estimates could cause actual results to
differ from
these amounts.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Strategy Advisors Inc. ("SBSA"), a wholly owned
subsidiary
of
Smith Barney Mutual Funds Management Inc. ("SBMFM") which, in
turn, is a
subsidiary of Smith Barney Holdings Inc. ("SBH"), acts as
investment adviser
to
the Trust. The Fund pays SBSAan advisory fee calculated at an
annual rate of
0.55% of the average daily net assets. This fee is calculated
daily and paid
monthly.
SBSA has entered into a sub-advisory agreement with The
Boston Company
Advisors, Inc. ("Boston Advisors"). Pursuant to the sub-advisory
agreement,
Boston Advisors is responsible for the day-to-day portfolio
operations and
investment decisions for the Fund. As a result, SBSA will pay
Boston Advisors
a
monthly fee calculated at the annual rate of 0.275% of the average
daily net
assets.
SBMFM acts as the administrator of the Trust for which it
receives a fee
calculated at an annual rate of 0.20% of the average daily net
assets of each
fund. This fee is calculated daily and paid monthly.
The Trust and SBMFM had entered into a sub-administration
agreement with
Boston Advisors. Under this agreement, SBMFM paid Boston Advisors
a portion of
its administration fee at a rate agreed upon from time to time
between SBMFM
and
Boston Advisors. As of July 31, 1995, this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as
distributor
of
Trust shares and primary broker for its portfolio agency
transactions. For
the
year ended December 31, 1995, SB received brokerage commissions
of $61,755
and
sales charges of approximately $72,000 on sales of the Fund's
Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00%
on Class B
shares, which applies if redemption occurs less than one year from
initial
purchase and declines thereafter by 1.00% per year until no CDSC
is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption
occurs within
the
first year of purchase. For the year ended December 31, 1995,
CDSCs paid to SB
for Class B shares were approximately $785,000.
14
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
Pursuant to a Distribution Plan, the Fund pays a service fee
with respect
to Class A, B and C shares calculated at the annual rate of 0.25%
of the
average
daily net assets for each respective class. The Fund also pays a
distribution
fee with respect to Class B and C shares calculated at the annual
rate of
0.75%
of the average daily net assets for each class, respectively. For
the year
ended
December 31, 1995, total Distribution Plan fees incurred were:
Class A Class
B Class
C
==================================================================
=========
=====
Distribution Plan Fees $197,018
$1,737,952 $6,895
==================================================================
=========
=====
All officers and one Trustee of the Trust are employees of
SB.
3. INVESTMENTS
During the year ended December 31, 1995, the aggregate cost
of purchases
and proceeds from sales of investments (including maturities, but
excluding
short-term securities) were as follows:
==================================================================
=========
=====
Purchases
$
65,391,206
- ------------------------------------------------------------------
- ------------
- --
Sales
120,833,305
==================================================================
=========
=====
At December 31, 1995, the aggregate gross unrealized
appreciation
and
depreciation of investments for Federal income tax purposes were
as follows:
==================================================================
=========
=====
Gross unrealized appreciation
$32,022,221
Gross unrealized depreciation
(17,583,696)
- ------------------------------------------------------------------
- ------------
- --
Net unrealized appreciation
$14,438,525
==================================================================
=========
=====
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of)
U.S.
Government
securities from banks and securities dealers subject to agreements
to resell
the
securities to the sellers at a future date (generally, the next
business day)
at
an agreed-upon higher repurchase price. The Fund requires
continual
maintenance
of the market value of the collateral in amounts at least equal to
the
repurchase price.
15
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
5. SHARES OF BENEFICIAL INTEREST
At December 31, 1995, the Trust had an unlimited number of
shares of
beneficial interest authorized with a par value of $0.001 per
share. The Fund
has the ability to issue multiple classes of shares. Each share of
a class
represents an identical interest and has the same rights, except
that each
class
bears certain direct expenses, including those specifically
related to the
distribution of its shares.
At December 31, 1995, total paid-in capital amounted to the
following for
each class:
Class A Class B
Class C
==================================================================
=========
=====
Total Paid-in Capital $49,762,914 $153,494,921
$945,155
==================================================================
=========
=====
Transactions in shares of each class were as follows:
</TABLE>
<TABLE>
<CAPTION>
Year Ended
Year Ended
December 31, 1995
December
31, 1994
---------------------
- ---------
- -------------
Shares Amount
Shares
Amount
==================================================================
=========
======
=============
<S> <C> <C>
<C>
<C>
Class A
Shares sold 439,191 $5,782,257
2,118,919
$26,465,297
Shares issued on reinvestment 89,091 1,112,742
69,569
828,566
Shares redeemed (1,986,028) (24,990,603)
(1,170,354)
(14,398,989)
- ------------------------------------------------------------------
- ------------
- ----------------
Net Increase (Decrease) (1,457,746) $(18,095,604)
1,018,134
$12,894,874
==================================================================
=========
======
=============
Class B
Shares sold 1,428,073 $18,024,709
6,989,940
$85,839,378
Shares issued on reinvestment 214,141 2,633,929
43,682
516,322
Shares redeemed (4,973,188) (61,409,297)
(3,572,347)
(43,504,970)
- ------------------------------------------------------------------
- ------------
- ----------------
Net Increase (Decrease) (3,330,974) $(40,750,659)
3,461,275
$42,850,730
==================================================================
=========
======
=============
Class C
Shares sold 76,994 $974,706
12,569
$154,200
Shares issued on reinvestment 1,389 17,353
32
389
Shares redeemed (15,863) (200,893)
- --
- --
- ------------------------------------------------------------------
- ------------
- ----------------
Net Increase 62,520 $791,166
12,601
$154,589
==================================================================
=========
======
=============
</TABLE>
6. CONCENTRATION OF CREDIT
Because the Fund concentrates its investments in one
industry, its
portfolio may be subject to greater risk and market fluctuations
than a
portfolio of securities representing a broader range of investment
alternatives.
The economic and business cycle risks associated with the
concentration of the
Fund in only one industry could mean that adverse conditions could
substantially
impact the dividends paid by the Fund and the value of the Fund's
holdings.
16
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights
- ------------------------------------------------------------------
- ------------
- --
For a share of each class of beneficial interest outstanding
throughout
each
year:
<TABLE>
<CAPTION>
Class A Shares 1995
1994(1)
1993(1) 1992 1991
==================================================================
=========
======
=====================================
<S> <C>
<C>
<C> <C> <C>
Net Asset Value, Beginning of Year $11.91
$12.86
$9.63 $8.68 $7.36
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.03)
(0.04)
(0.04) 0.05 0.06
Net realized and unrealized gain (loss) 1.04
(0.78)
3.44 1.63 1.47
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Total Income (Loss) From Operations 1.01
(0.82)
3.40 1.68 1.53
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Less Distributions From:
Net investment income --
(0.13)
- -- (0.02) (0.06)
Net realized gains (0.21)
- --
(0.17) (0.71) (0.14)
Capital --
- --
- -- -- (0.01)
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Total Distributions (0.21)
(0.13)
(0.17) (0.73) (0.21)
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Net Asset Value, End of Year $12.71
$11.91
$12.86 $9.63 $8.68
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Total Return 8.54%
(6.37)
35.27% 19.41% 20.94%
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Net Assets, End of Year (000s) $71,059
$83,918
$77,564 $36,947 $34,643
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Ratios to Average Net Assets:
Expenses 1.27%
1.24%
1.34% 1.31% 1.19%
Net investment income (loss) (0.23)
(0.29)
(0.32) 0.55 0.67
- ------------------------------------------------------------------
- ------------
- ----------------------------------------
Portfolio Turnover Rate 27%
19%
25% 64% 111%
==================================================================
=========
======
=====================================
Average commissions paid on
equity security transactions(2) $0.05
- --
- -- -- --
==================================================================
=========
======
=====================================
</TABLE>
(1) 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.
(2) New SEC disclosure guidelines require that average
commissions per share
be
calculated and presented for the current year only.
17
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights (continued)
- ------------------------------------------------------------------
- ------------
- --
For a share of each class of beneficial interest outstanding
throughout
each
year:
<TABLE>
<CAPTION>
Class B Shares
Class C Shares
------------------
- ------------
- -------------- -----------------------
1995
1994(1)
1993(1) 1992(2) 1995 1994(1)(3)
==================================================================
=========
======
=========================================
<S> <C> <C>
<C>
<C> <C> <C>
Net Asset Value, Beginning of Year $11.82
$12.77
$9.63 $9.33 $12.00
$12.70
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.12)
(0.14)
(0.14) (0.00)* (0.13) (0.01)
Net realized and unrealized gain (loss) 1.02
(0.78)
3.45 1.02 1.05 (0.66)
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Total Income (Loss) From Operations 0.90
(0.92)
3.31 1.02 0.92 (0.67)
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Less Distributions From:
Net investment income --
(0.03) -
- - (0.01) -- (0.03)
Net realized gains (0.21) -
- -
(0.17) (0.71) (0.21) --
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Total Distributions (0.21)
(0.03)
(0.17) (0.72) (0.21) (0.03)
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Net Asset Value, End of Year $12.51
$11.82
$12.77 $9.63 $12.71 $12.00
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Total Return 7.67%
(7.17)%
34.34% 10.98%++ 7.73%
(5.24)%++
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Net Assets, End of Year (000s) $155,222
$185,980
$156,781 $586 $955
$151
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Ratios to Average Net Assets:
Expenses 2.02%
2.07%
2.18% 2.21%+ 2.02% 2.08%+
Net investment loss (0.98)
(1.11)
(1.16) (0.38)+ (0.98) (1.13)+
- ------------------------------------------------------------------
- ------------
- --------------------------------------------
Portfolio Turnover Rate .27%
.19%
.25% .64% .27% .19%
==================================================================
=========
======
=========================================
Average commissions paid on
equity security transactions(4) $0.05 -
- - -
- - -- $0.05 --
==================================================================
=========
======
=========================================
</TABLE>
(1) 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.
(2) For the period from November 6, 1992 (inception date) to
December 31,
1992.
(3) For the period from November 7, 1994 (inception date) to
December 31,
1994.
(4) New SEC disclosure guidelines require that average
commissions per share
be
calculated and presented for the current year only.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be
representative of the
total return for the year.
+ Annualized.
18
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Independent Auditors' Report
- ------------------------------------------------------------------
- ------------
- --
The Shareholders and Board of Trustees of
Smith Barney Telecommunications Trust:
We have audited the accompanying statement of assets and
liabilities,
including the schedule of investments, of the Smith Barney
Telecommunications
Growth Fund of Smith Barney Telecommunications Trust as of
December 31, 1995,
and the related statements of operations, changes in net assets,
and financial
highlights for the year then ended. These financial statements and
financial
highlights are the responsibility of the Fund's management. Our
responsibility
is to express an opinion on these financial statements and
financial
highlights
based on our audit. The statement of changes in net assets for the
year ended
December 31, 1994 and the financial highlights for each of the
years in the
four-year period then ended were audited by other auditors whose
report
thereon,
dated February 3, 1995, expressed an unqualified opinion on that
statement of
changes in net assets and those financial highlights.
We conducted our audit in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain
reasonable assurance about whether the financial statements and
financial
highlights are free of material misstatement. An audit includes
examining, on
a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities
owned as of
December 31, 1995, by correspondence with the custodian. As to
securities
purchased and sold but not received or delivered, we performed
other
appropriate
auditing procedures. An audit also includes assessing the
accounting
principles
used and significant estimates made by management, as well as
evaluating the
overall financial statement presentation. We believe that our
audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present
fairly,
in all material respects, the financial position of the Smith
Barney
Telecommunications Growth Fund of Smith Barney Telecommunications
Trust as of
December 31, 1995, and the results of its operations, changes in
its net
assets
and its financial highlights for the year then ended, in
conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 22, 1996
19
<PAGE>
Smith Barney Telecommunications Growth Fund
- ------------------------------------------------------------------
- ------------
- --
Additional Information
- ------------------------------------------------------------------
- ------------
- --
Change in Independent Auditor: On October 20, 1994, based
upon the
recommendation of the Audit Committee of the Fund, the Board of
Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers &
Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick
LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit
reports
contained no adverse opinion or disclaimer of opinion; nor were
the reports
qualified or modified as to uncertainty, audit scope, or
accounting
principles.
Further, during this same period there were no disagreements with
Coopers &
Lybrand on any matter of accounting principles or practices,
financial
statement
disclosure, or auditing scope or procedure, which disagreements,
if not
resolved
to the satisfaction of Coopers & Lybrand, would have caused it to
make
reference
to the subject matter of such disagreements in connection with its
audit
reports. The Fund has requested Coopers & Lybrand to provide a
letter to the
Securities and Exchange Commission stating whether Coopers &
Lybrand agrees
with
the foregoing statements, and to provide the Fund with a copy of
such letter.
A
copy of this letter is available upon request by calling the Fund
at (212)
723-9218.
- ------------------------------------------------------------------
- ------------
- --
Tax Information (unaudited)
- ------------------------------------------------------------------
- ------------
- --
The amount of long-term capital gains paid by the Fund to its
shareholders
for the fiscal year ended December 31, 1995, was $3,980,765.
20
<PAGE>
Smith Barney
SMITH
BARNEY
Telecommunications
- ----------
- --
Growth Fund A Member of
Travelers Group
[LOGO]
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Strategy
Advisers Inc.
Administrator
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNCBank
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the
shareholders of
Smith Barney Telecommunications Growth Fund. It is not authorized
for
distribution to prospective investors unless accompanied or
preceded by a
current Prospectus for the Fund, which contains information
concerning the
Fund's investment policies and expenses as well as other pertinent
information.
Smith Barney
Telecommunications
Growth Fund
388 Greenwich Street
New York, New York 10013
FD0320 2/96
STATEMENT OF ADDITIONAL INFORMATION OF
SMITH BARNEY SPECIAL EQUITIES FUND
DATED APRIL 29, 1996 IS INCORPORATED BY REFERENCE TO
POST EFFECTIVE AMENDMENT NO. 43 TO THE INVESTMENT FUNDS
REGISTRATION
STATEMENT ON FORM N-1A FILED ON APRIL 29, 1996.
REFERENCE NOS 2-74288 AND 811-3275
ANNUAL REPORT
OF
SMITH BARNEY SPECIAL EQUITIES FUND
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
-------------
ANNUAL REPORT
-------------
1995
1995
1995
1995
1995
Smith Barney
Special
Equities Fund
---------------------
- ----
December 31, 1995
[LOGO] Smith Barney Mutual
Funds
Investing for your
future.
Every day.
<PAGE>
- ----------------------------------
Smith Barney Special Equities Fund
- ----------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report and audited
financial
statements for Smith Barney Special Equities Fund for the year
ended December
31, 1995. In this report, we outline our investment strategy and
discuss stock
market conditions in 1995. A more detailed summary of performance
and current
holdings can be found in the appropriate sections that follow in
the annual
report.
The year 1995 began slowly, rose to a loud crescendo, tapered off
a bit and
ended strongly. Coming into 1995, analyst expectations about both
the equity
markets and the economy were less than spectacular. Many
investment
professionals had expected a difficult year for the stock market.
Yet what
unfolded in 1995 has to be considered one of the "great" years for
the
markets,
much like a classic "great" wine.
In the early part of the year, when investor concerns about
economic growth,
inflation and the direction of interest rates prevailed, the
equity markets
were
essentially calm. Then, as the economy slowed down, interest rates
declined
and
inflation concerns subsided, the equity markets began to hit new
highs with
such
frequency it soon became the norm. All of the major stock market
indices
participated: The Dow Jones Industrial Average and the Standard &
Poor's
500-Stock Price Index finished the year up 36.94% and 37.53%,
respectively.
The
NASDAQ Composite Index and the Russell 2000 Index rose 39.92% and
28.45%,
respectively.
The stock market rally, led by a huge concentration of investors
in technology
stocks, began to falter in August with the announcement of a
slight
disappointment in earnings from Intel. This earnings report from
Intel raised
a
red flag to investors about other technology stocks which began a
sharp
decline
from their highs. This sell-off in technology stocks affected the
markets,
especially the universe of small-capitalization stocks. Small-
capitalization
stocks underperformed large-capitalization stocks over the full
year. Then, in
mid-December, technology stocks rebounded, causing a strong finish
for all the
major stock market averages. Because Smith Barney Special Equities
invests in
small, emerging growth companies, its holdings are generally not
affected by
broad economic and market conditions. For the one-year period
ended December
31,
1995, Smith Barney Special Equities Fund posted a cumulative total
return
(which
excludes the effects of all sales charges) of 63.48% for Class A
shares.
1
<PAGE>
Fund's Investment Strategy
In the past year, Smith Barney Special Equities Fund continued to
buy stocks
of
companies with strong fundamentals and above-average growth
prospects with the
intention of holding them. We do not focus on short-term price
fluctuations as
long as the Fund believes a company's fundamentals remain viable
and growth
can
be sustained over a full market cycle. At year end, the Fund's
top-five
holdings
were:
- -- Ascend Communications Inc.
- -- Macromedia Inc.
- -- Baby Superstore Inc.
- -- Starbucks Corp.
- -- Callaway Golf Co.
For 1996, we expect the early part of the year to be challenging
for
small-capitalization stocks. However, we believe the relative
performance of
small-capitalization stocks may improve as the year progresses.
At this time, we would like to thank you for your investment in
Smith Barney
Special Equities Fund.
Sincerely,
/s/ Heath B. McLendon /s/ George
V. Novello
Heath B. McLendon George V.
Novello
Chairman and Investment
Officer
Chief Executive Officer
January 30, 1996
2
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class A Shares
- ------------------------------------------------------------------
- ------------
- --
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions
of Capital
Returns(1)
==================================================================
=========
======
=======
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $19.10 $30.44 $0.00 $0.76
$0.00
63.48%
- ------------------------------------------------------------------
- ------------
- ----------
12/31/94 20.23 19.10 0.00 0.00
0.00
(5.59)
- ------------------------------------------------------------------
- ------------
- ----------
12/31/93 15.47 20.23 0.00 0.33
0.00
32.90
- ------------------------------------------------------------------
- ------------
- ----------
Inception* - 12/31/92 14.13 15.47 0.00 0.00
0.00
9.48+
==================================================================
=========
======
=======
Total $0.00 $1.09
$0.00
==================================================================
=========
======
=======
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class B Shares
- ------------------------------------------------------------------
- ------------
- --
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions
of Capital
Returns(1)
==================================================================
=========
======
=======
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $18.82 $29.76 $0.00 $0.76
$0.00
62.30%
- ------------------------------------------------------------------
- ------------
- ----------
12/31/94 20.08 18.82 0.00 0.00
0.00
(6.27)
- ------------------------------------------------------------------
- ------------
- ----------
12/31/93 15.47 20.08 0.00 0.33
0.00
31.93
- ------------------------------------------------------------------
- ------------
- ----------
12/31/92 14.18 15.47 0.00 0.00
0.00
9.10
- ------------------------------------------------------------------
- ------------
- ----------
12/31/91 9.82 14.18 0.00 0.00
0.03
44.76
- ------------------------------------------------------------------
- ------------
- ----------
12/31/90 13.77 9.82 0.29 0.23
0.02
(24.71)
- ------------------------------------------------------------------
- ------------
- ----------
12/31/89 12.04 13.77 0.27 0.00
0.24
18.60
- ------------------------------------------------------------------
- ------------
- ----------
12/31/88 11.48 12.04 0.55 0.30
0.00
12.60
- ------------------------------------------------------------------
- ------------
- ----------
12/31/87 13.02 11.48 0.00 0.14
0.00
(10.91)
- ------------------------------------------------------------------
- ------------
- ----------
12/31/86 13.15 13.02 0.05 1.00
0.00
7.05
==================================================================
=========
======
=======
Total $1.16 $2.76
$0.29
==================================================================
=========
======
=======
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class C Shares
- ------------------------------------------------------------------
- ------------
- --
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain
Return
Total
Year Ended of Year of Year Dividends Distributions
of Capital
Returns(1)
==================================================================
=========
======
=========
<C> <C> <C> <C> <C>
<C>
<C>
12/31/95 $18.82 $29.77 $0.00 $0.76
$0.00
62.35%
- ------------------------------------------------------------------
- ------------
- ------------
12/31/94 20.08 18.82 0.00 0.00
0.00
(6.27)
- ------------------------------------------------------------------
- ------------
- ------------
Inception* - 12/31/93 22.62 20.08 0.00 0.33
0.00
(9.77)+
==================================================================
=========
======
=========
Total $0.00 $1.09
* $0.00
==================================================================
=========
======
=========
</TABLE>
3
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Historical Performance -- Class Z Shares
- ------------------------------------------------------------------
- ------------
- --
<TABLE>
Net Asset Value
------------------
Beginning End Income Capital Gain Return
Total
Year Ende of Year of Year Dividends Distributions of Capital
Returns(1)
==================================================================
=========
=
<S> <C> <C> <C> <C> <C>
<C>
Inception* - 12/31/95 $26.49 $30.46 $0.00 $0.76 $0.00
17.95%+
==================================================================
=========
</TABLE>
It is the Funds' policy to distribute dividends and capital gains,
if any,
annually.
- ------------------------------------------------------------------
- ------------
- --
Average Annual Return
- ------------------------------------------------------------------
- ------------
- --
Without Sales
Charge(1)
--------------------------
- ------------
- --
Class A Class B Class
C Class
Z
==================================================================
=========
=====
Year Ended 12/31/95 63.48% 62.30%
62.35% N/A
- ------------------------------------------------------------------
- ------------
- --
Five Years Ended 12/31/95 N/A 25.95
N/A N/A
- ------------------------------------------------------------------
- ------------
- --
Ten Years Ended 12/31/95 N/A 11.76
N/A N/A
- ------------------------------------------------------------------
- ------------
- --
Inception* through 12/31/95 29.39 11.98
15.48
17.95%+
==================================================================
=========
=====
With Sales
Charge(2)
-------------------------
- ------------
- --
Class A Class B Class
C Class
Z
==================================================================
=========
=====
Year Ended 12/31/95 55.31% 57.30%
61.35% N/A
- ------------------------------------------------------------------
- ------------
- --
Five Years Ended 12/31/95 N/A 25.87
N/A N/A
- ------------------------------------------------------------------
- ------------
- --
Ten Years Ended 12/31/95 N/A 11.76
N/A N/A
- ------------------------------------------------------------------
- ------------
- --
Inception* through 12/31/95 27.30 11.98
15.48
17.95%+
==================================================================
=========
=====
- ------------------------------------------------------------------
- ------------
- --
Cumulative Total Return
- ------------------------------------------------------------------
- ------------
- --
Without
Sales
Charge(1)
==================================================================
=========
=====
Class A (Inception* through 12/31/95)
124.59%
- ------------------------------------------------------------------
- ------------
- --
Class B (12/31/85 through 12/31/95)
203.96
- ------------------------------------------------------------------
- ------------
- --
Class C (Inception* through 12/31/95)
37.29
- ------------------------------------------------------------------
- ------------
- --
Class Z (Inception* through 12/31/95)
17.95+
==================================================================
=========
=====
(1) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value and does not reflect deduction of the
applicable
sales charge with respect to Class A shares or the applicable
contingent
deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions, if
any, at net asset value. In addition, Class A shares reflect
the deduction
of the maximum initial sales charge of 5.00%; Class B shares
reflect the
deduction of a 5.00% CDSC, which applies if shares are
redeemed less than
one year from initial purchase and declines thereafter by
1.00% per year
until no CDSCis incurred. Class C shares reflect the deduction
of a 1.00%
CDSC, which applies if shares are redeemed within the first
year of
purchase.
* Inception dates for Class A, B, C and Z shares are November 6,
1992,
December 13, 1982, October 18, 1993 and October 2, 1995,
respectively.
+ Total return is not annualized, as it may not be
representative of the
total
return for the year.
4
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Historical Performance (unaudited)
- ------------------------------------------------------------------
- ------------
- --
Growthof $10,000 Invested in Class B Shares
of the Smith Barney Special Equities
Fund vs.
Standard & Poor's 500 Index+
- ------------------------------------------------------------------
- ------------
- --
December 1985 -- December 1995
[The following table was represented by a line chart in the
printed
material.]
Smith Barney Special Equities Fund S&P 500
Index
---------------------------------- ----------
- ---
12/85 10,000 10,000
12/86 10,705 11,687
12/87 9,538 12,490
12/88 10,740 14,559
12/89 12,738 19,165
12/90 9,591 18,569
12/91 13,883 24,216
12/92 15,146 26,059
12/93 19,983 28,678
12/94 18,729 29,056
12/95 30,396 39,961
+ Hypothetical illustration of $10,000 invested in Class B
shares on
December
31, 1985, assuming reinvestment of dividends and capital
gains, if any, at
net asset value through December 31, 1995. The Standard &
Poor's 500 Index
is composed of widely held common stocks listed on the New
York Stock
Exchange, American Stock Exchange and the over-the-counter
market. Figures
for the index include reinvestment of dividends. The index is
unmanaged
and
is not subject to the same management and trading expenses as
a mutual
fund.
The performance of the Fund's other classes may be greater or
less than
the
Class B shares' performance indicated on this chart, depending
on whether
greater or lesser sales charges and fees were incurred by
shareholders
investing in the other classes.
All figures represent past performance and are not a guarantee
of future
results. Investment returns and principal value will
fluctuate, and
redemption value may be more or less than the original cost.
No adjustment
has been made for shareholder tax liability on dividends or
capital gains.
5
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Portfolio Highlights (unaudited)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
Portfolio Breakdown
[The following table was represented by a pie chart in the
printed
material.]
Retail 17.2%
Communications 14.8%
Software 12.1%
Restaurant 9.3%
Healthcare 8.2%
Semi-conductor and Electronics 7.7%
Technology 6.8%
Office Products 6.6%
Other Common Stocks 7.5%
Repurchase Agreements 9.8%
Top Ten Common Stock Holdings
Percentage of
Total
Investments
==================================================================
=========
=====
Ascend Communications Inc.
7.1%
Macromedia Inc.
5.7
Baby Superstore Inc.
5.0
Starbucks Corp.
4.5
Callaway Golf Co.
4.0
Boston Chicken Inc.
3.9
PETsMart Inc.
3.6
Adtran Inc.
3.5
Sunglass Hut International Inc.
3.5
C-Cube Microsystems Inc.
3.4
==================================================================
=========
=====
6
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
COMMON STOCKS -- 90.2%
Advertising -- 0.7%
65,000 CKS Group Inc.*
$
2,535,000
- ------------------------------------------------------------------
- ------------
- --
Brewers -- 0.9%
80,000 Boston Beer Co. Inc.*
1,900,000
50,000 Redhook Ale Brewery Inc.*
1,300,000
- ------------------------------------------------------------------
- ------------
- --
3,200,000
- ------------------------------------------------------------------
- ------------
- --
Business Services -- 0.5%
50,000 Corestaff Inc.*
1,825,000
- ------------------------------------------------------------------
- ------------
- --
Communications -- 14.8%
220,000 Adtran Inc.*
11,948,750
150,000 America Online Inc.*
5,625,000
100,000 Arch Communications Group Inc.*
2,400,000
300,000 Ascend Communications Inc.*
24,337,152
200,000 Aspect Telecommunications Corp.*
6,700,000
- ------------------------------------------------------------------
- ------------
- --
51,010,902
- ------------------------------------------------------------------
- ------------
- --
Entertainment and Leisure -- 4.0%
600,000 Callaway Golf Co.
13,575,000
- ------------------------------------------------------------------
- ------------
- --
Healthcare -- 8.2%
35,000 HCIA Inc.*
1,636,250
45,000 Henry Schein Inc.*
1,327,500
50,000 IDX Systems Corp.*
1,737,500
80,000 Occusystems Inc.*
1,600,000
150,000 Phycor Inc.*
7,584,375
60,000 Physicians Sales & Service Inc.*
1,710,000
100,000 Steris Corp.*
3,225,000
220,000 Target Therapeutics Inc.*
9,405,000
- ------------------------------------------------------------------
- ------------
- --
28,225,625
- ------------------------------------------------------------------
- ------------
- --
Office Products -- 6.6%
200,000 Corporate Express Inc.*
6,025,000
200,000 Micro Warehouse Inc.*
8,650,000
150,000 Officemax Inc.*
3,356,250
100,000 Viking Office Products Inc.*
4,650,000
- ------------------------------------------------------------------
- ------------
- --
22,681,250
- ------------------------------------------------------------------
- ------------
- --
Pharmaceuticals -- 1.2%
85,000 Biochem Pharma Inc.*
3,410,625
25,000 Centocor Inc.*
771,875
- ------------------------------------------------------------------
- ------------
- --
4,182,500
- ------------------------------------------------------------------
- ------------
- --
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments (continued)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
Restaurant -- 9.3%
420,000 Boston Chicken Inc.*
$13,492,500
164,000 Manhattan Bagel Co.*
2,952,000
740,000 Starbucks Corp.*
15,540,000
- ------------------------------------------------------------------
- ------------
- --
31,984,500
- ------------------------------------------------------------------
- ------------
- --
Retail -- 17.2%
300,000 Baby Superstore Inc.*
17,100,000
60,000 De Rigo S.p.A. ADR*
1,365,000
100,000 Global DirectMail Corp.*
2,750,000
285,000 The Mens Wearhouse Inc.*
7,338,750
60,000 MSC Industrial Direct Co.*
1,635,000
130,000 Oakley Inc.*
4,420,000
405,000 PETsMART Inc.*
12,555,000
500,000 Sunglass Hut International Inc.*
11,875,000
- ------------------------------------------------------------------
- ------------
- --
59,038,750
- ------------------------------------------------------------------
- ------------
- --
Semi-Conductor and Electronics -- 7.7%
185,000 C-Cube Microsystems Inc.*
11,562,500
170,000 Discreet Logic Inc.*
4,250,000
105,000 Gemstar International Group Ltd.*
2,979,375
175,000 LSI Logic Corp.*
5,731,250
90,000 Zoran Corp.*
1,867,500
- ------------------------------------------------------------------
- ------------
- --
26,390,625
- ------------------------------------------------------------------
- ------------
- --
Software -- 12.1%
100,000 Baan Co. NV*
4,525,000
100,000 Datalogix International Inc.*
1,262,500
50,000 Davidson & Associates Inc.*
1,100,000
375,000 Macromedia Inc.*
19,593,750
100,000 Maxis Inc.*
3,800,000
265,000 Peoplesoft Inc.*
11,395,000
- ------------------------------------------------------------------
- ------------
- --
41,676,250
- ------------------------------------------------------------------
- ------------
- --
Technology -- 6.8%
120,000 Avant Corp.*
2,310,000
70,000 Harbinger Corp.*
1,610,000
80,000 Metatools Inc.*
2,080,000
30,000 Objective Systems Integrators Inc.*
1,642,500
75,000 Premenos Technology Corp.*
1,978,125
130,000 Shiva Corp.*
9,457,500
100,000 Verity Inc.*
4,425,000
- ------------------------------------------------------------------
- ------------
- --
23,503,125
- ------------------------------------------------------------------
- ------------
- --
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Schedule of Investments (continued)
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
SHARES SECURITY
VALUE
==================================================================
=========
=====
Transportation -- 0.2%
20,000 Eagle USA Airfreight Inc.*
$
525,000
- ------------------------------------------------------------------
- ------------
- --
TOTAL COMMON STOCKS
(Cost -- $180,428,567)
310,353,527
==================================================================
=========
=====
WARRANT -- 0.0%
696 Jan Bell Marketing Inc., Expires 12/16/98
348
==================================================================
=========
=====
FACE
AMOUNT SECURITY
VALUE
==================================================================
=========
=====
REPURCHASE AGREEMENTS -- 9.8%
$33,762,000 Morgan Stanley Group, Inc., 5.844% due 1/2/96;
Proceeds at maturity -- $33,783,924; (Fully
collateralized by U.S. Treasury Notes,
5.125% due 4/30/98; Market value -- $34,446,971)
33,762,000
76,000 Goldman Sachs & Co., 5.649% due 1/2/96; Proceeds
at maturity -- $76,048; (Fully collateralized by
U.S. Treasury Notes,
5.375% due 11/30/97; Market value -- $77,555)
76,000
- ------------------------------------------------------------------
- ------------
- --
TOTAL REPURCHASE AGREEMENTS
(Cost -- $33,838,000)
33,838,000
==================================================================
=========
=====
TOTAL INVESTMENTS -- 100%
(Cost -- $214,266,567)++
$344,191,875
==================================================================
=========
=====
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is
$214,745,389.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Statement of Assets and Liabilities
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
ASSETS:
Investments, at value (Cost -- $214,266,567)
$
344,191,875
Cash
1,067
Receivable for securities sold
308,750
Receivable for Fund shares sold
5,004,240
Interest receivable
16,479
- ------------------------------------------------------------------
- ------------
- --
Total Assets
349,522,411
- ------------------------------------------------------------------
- ------------
- --
LIABILITIES:
Payable for securities purchased
2,871,875
Payable for Fund shares purchased
614,072
Investment advisory fees payable
151,195
Distribution fees payable
107,420
Administration fees payable
54,980
Accrued expenses
544,664
- ------------------------------------------------------------------
- ------------
- --
Total Liabilities
4,344,206
- ------------------------------------------------------------------
- ------------
- --
Total Net Assets
$345,178,205
==================================================================
=========
=====
NET ASSETS:
Par value of capital shares
$
11,476
Capital paid in excess of par value
209,932,095
Accumulated net realized gain on security transactions
5,309,326
Net unrealized appreciation of investments
129,925,308
- ------------------------------------------------------------------
- ------------
- --
Total Net Assets
$345,178,205
==================================================================
=========
=====
Shares Outstanding:
Class A
5,234,499
- ------------------------------------------------------------------
- ------------
- --
Class B
5,748,436
- ------------------------------------------------------------------
- ------------
- --
Class C
316,409
- ------------------------------------------------------------------
- ------------
- --
Class Z
176,117
- ------------------------------------------------------------------
- ------------
- --
Net Asset Value:
Class A (and redemption price)
$30.44
- ------------------------------------------------------------------
- ------------
- --
Class B*
$29.76
- ------------------------------------------------------------------
- ------------
- --
Class C**
$29.77
- ------------------------------------------------------------------
- ------------
- --
Class Z (and redemption price)
$30.46
- ------------------------------------------------------------------
- ------------
- --
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share)
$32.04
==================================================================
=========
=====
* Redemption price is NAV of Class B shares reduced by a 5.00%
CDSC if
shares
are redeemed less than one year from initial purchase (See
Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00%
CDSC if
shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Statement of Operations For the Year Ended
December 31,
1995
- ------------------------------------------------------------------
- ------------
- --
INVESTMENT INCOME:
Interest
$
810,146
Dividends
165,805
- ------------------------------------------------------------------
- ------------
- --
Total Investment Income
975,951
- ------------------------------------------------------------------
- ------------
- --
EXPENSES:
Distribution fees (Note 2)
1,457,522
Investment advisory fees (Note 2)
1,276,355
Administration fees (Note 2)
464,129
Shareholder and system servicing fees
449,230
Registration fees
90,000
Shareholder communications
72,000
Audit and legal
50,400
Directors' fees
50,000
Custody
40,000
Other
221,944
- ------------------------------------------------------------------
- ------------
- --
Total Expenses
4,171,580
- ------------------------------------------------------------------
- ------------
- --
Net Investment Loss
(3,195,629)
- ------------------------------------------------------------------
- ------------
- --
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales
252,991,730
Cost of securities sold
231,031,531
- ------------------------------------------------------------------
- ------------
- --
Net Realized Gain
21,960,199
- ------------------------------------------------------------------
- ------------
- --
Change in Net Unrealized Appreciation of Investments:
Beginning of year
31,895,265
End of year
129,925,308
- ------------------------------------------------------------------
- ------------
- --
Increase in Net Unrealized Appreciation
98,030,043
- ------------------------------------------------------------------
- ------------
- --
Net Gain on Investments
119,990,242
- ------------------------------------------------------------------
- ------------
- --
Increase in Net Assets From Operations
$116,794,613
==================================================================
=========
=====
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Statement of Changes in Net Assets For the Years
Ended December
31,
- ------------------------------------------------------------------
- ------------
- --
<TABLE>
<CAPTION>
1995
1994
==================================================================
=========
======
==
<S> <C>
<C>
OPERATIONS:
Net investment loss $
(3,195,629) $
(2,749,410)
Net realized gain (loss) 21,960,199
(5,296,726)
Increase in net unrealized appreciation
(depreciation) 98,030,043
(3,369,494)
- ------------------------------------------------------------------
- ------------
- -----
Increase (Decrease) in Net Assets From Operations 116,794,613
(11,415,630)
- ------------------------------------------------------------------
- ------------
- -----
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net realized gains
(7,592,812)
- --
- ------------------------------------------------------------------
- ------------
- -----
Decrease in Net Assets From
Distributions To Shareholders
(7,592,812)
- --
- ------------------------------------------------------------------
- ------------
- -----
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 237,931,179
228,288,055
Net asset value of shares issued for
reinvestment of dividends 7,348,955
- --
Cost of shares reacquired
(205,804,360)
(209,078,842)
- ------------------------------------------------------------------
- ------------
- -----
Increase in Net Assets From
Fund Share Transactions 39,475,774
19,209,213
- ------------------------------------------------------------------
- ------------
- -----
Increase in Net Assets 148,677,575
7,793,583
NET ASSETS:
Beginning of year 196,500,630
188,707,047
- ------------------------------------------------------------------
- ------------
- -----
End of year $345,178,205
$196,500,630
==================================================================
=========
======
==
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements
- ------------------------------------------------------------------
- ------------
- --
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Special Equities Fund ("Portfolio"), a
separate
investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a
Maryland
corporation,
is registered under the Investment Company Act of 1940, as
amended, as a
diversified, open-end management investment company. The Fund
consists of the
Portfolio and four other separate investment portfolios: Smith
Barney
Government
Securities Fund, Smith Barney Managed Growth Fund, Smith Barney
Investment
Grade
Bond Fund and Smith Barney Growth Opportunity Fund. The financial
statements
and
financial highlights for the other portfolios are presented in
separate annual
reports.
The significant accounting policies consistently followed by
the
Portfolio
are: (a) securities transactions are accounted for on trade date;
(b)
securities
traded on national securities markets are valued at the closing
price on such
markets; securities traded in the over-the-counter market and
listed
securities
for which no sales price were reported are valued at the bid
price, or in the
absence of a recent bid price, at the bid equivalent obtained from
one or more
of the major market makers; (c) short-term securities that have a
maturity of
more than 60 days are valued at prices based on market quotations
for
securities
of similar type, yield and maturity; (d) short-term investments
and securities
maturing within 60 days are valued at cost plus accreted discount,
or minus
amortized premium, which approximates market value; (e) dividend
income is
recorded on ex-dividend date and interest income is recorded on
the accrual
basis; (f) gains or losses on the sale of securities are
calculated using the
specific identification method; (g) direct expenses are charged to
each
portfolio and each class; management fees and general portfolio
expenses are
allocated on the basis of relative net assets; (h) the Portfolio
intends to
comply with the applicable provisions of the Internal Revenue Code
of 1986, as
amended, pertaining to regulated investment companies and to make
distributions
of taxable income sufficient to relieve it from substantially all
Federal
income
and excise taxes; (i) the character of income and gains to be
distributed are
determined in accordance with income tax regulations which may
differ from
generally accepted accounting principles. At December 31, 1995,
reclassifications were made to the Portfolio's capital accounts to
reflect
permanent book/tax differences and income and gains available for
distributions
under income tax regulations. Net investment income, net realized
gains and
net
assets were not affected by this change; and (j) estimates and
assumptions are
required to be made regarding assets, liabilities and changes in
net assets
resulting from operations when financial statements are prepared.
Changes in
economic environment, financial markets and any other parameters
used in
determining these estimates could cause actual results to differ
from these
amounts.
13
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a
subsidiary of
Smith
Barney Holdings Inc. ("SBH"), acts as investment advisor to the
Fund. The
Portfolio pays SBMFM an investment advisory fee calculated at an
annual rate
of
0.55% of the average daily net assets. This fee is calculated
daily and paid
monthly.
SBMFM also acts as the Fund's administrator for which the
Portfolio pays
a
fee calculated at an annual rate of 0.20% of the average daily net
assets.
This
fee is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston
Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had
entered into
a
sub-administration agreement with the Fund and SBMFM. SBMFM paid
Boston
Advisors
a portion of its administration fee at a rate agreed upon from
time to time
between SBMFM and Boston Advisors. As of August 18, 1995, this
relationship
was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as
distributor
of
Fund shares and primary broker for its portfolio agency
transactions. For the
year ended December 31, 1995, SB received brokerage commissions of
$11,052 and
sales charges of approximately $347,000 on sales of the
Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00%
on Class B
shares, which applies if redemption occurs less than one year from
initial
purchase and declines thereafter by 1.00% per year until no CDSC
is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption
occurs within
the
first year of purchase. For the year ended December 31, 1995,
CDSCs paid to SB
were approximately:
Class B
Class
C
==================================================================
=========
=====
CDSCs $379,000
$1,000
==================================================================
=========
=====
14
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
Pursuant to a Distribution Plan, the Portfolio pays a service
fee with
respect to its Class A, B and C shares calculated at an annual
rate of 0.25%
of
the average daily net assets of each respective class. The
Portfolio also pays
a
distribution fee with respect to its Class B and C shares
calculated at an
annual rate of 0.75% of the average daily net assets for each
class,
respectively. For the year ended December 31, 1995, total
Distribution Plan
fees
incurred by the Portfolio were:
Class A Class B
Class
C
==================================================================
=========
=====
Distribution Plan Fees $286,910 $1,135,911
$34,701
==================================================================
=========
=====
All officers and one Director of the Fund are employees of
SB.
3. INVESTMENTS
During the year ended December 31, 1995, the aggregate cost
of purchases
and proceeds from sales of investments (including maturities, but
excluding
short-term securities) were as follows:
==================================================================
=========
=====
Purchases
$261,742,233
- ------------------------------------------------------------------
- ------------
- --
Sales
252,991,730
==================================================================
=========
=====
At December 31, 1995, the aggregate gross unrealized
appreciation and
depreciation of investments for Federal income tax purposes were
as follows:
==================================================================
=========
=====
Gross unrealized appreciation
$134,056,607
Gross unrealized depreciation
(4,610,121)
- ------------------------------------------------------------------
- ------------
- --
Net unrealized appreciation
$129,446,486
==================================================================
=========
=====
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession
of) U.S.
Government securities from banks and securities dealers subject to
agreements
to
resell the securities to the sellers at a future date (generally,
the next
business day), at an agreed-upon higher repurchase price. The
Portfolio
requires
continual maintenance of the market value of the collateral in
amounts at
least
equal to the repurchase price.
5. CAPITAL SHARES
At December 31, 1995, the Fund had ten billion shares of
capital stock
authorized with a par value of $0.001 per share. The Portfolio has
the ability
to issue multiple classes of shares. Each share of a class
represents an
identical interest
15
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Notes to Financial Statements (continued)
- ------------------------------------------------------------------
- ------------
- --
and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the
distribution of
its
shares.
At December 31, 1995, total paid-in capital amounted to the
following for
each class:
Class A Class B Class C
Class
Z
==================================================================
=========
=====
Total Paid-in Capital $98,872,747 $98,223,631
$7,872,898
$4,974,295
==================================================================
=========
=====
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended
Year Ended
December 31, 1995*
December 31, 1994
----------------------
- --------
- --------------
Shares Amount
Shares
Amount
==================================================================
=========
======
===============
<S> <C> <C>
<C>
<C>
Class A
Shares sold 6,906,656 $158,758,785
6,100,691 $113,645,641
Shares issued on reinvestment 116,734 3,420,305
- -
- - --
Shares redeemed (7,078,890) (159,234,258)
(3,288,861) (62,287,789)
- ------------------------------------------------------------------
- ------------
- ------------------
Net Increase (Decrease) (55,500) $2,944,832
2,811,830 $51,357,852
==================================================================
=========
======
===============
Class B
Shares sold 2,715,135 $66,677,618
6,054,365 $113,219,270
Shares issued on reinvestment 128,647 3,689,606
- -
- - --
Shares redeemed (2,085,066) (45,134,660)
(7,958,837) (146,720,375)
- ------------------------------------------------------------------
- ------------
- ------------------
Net Increase (Decrease) 758,716 $25,232,564
(1,904,472) $(33,501,105)
==================================================================
=========
======
===============
Class C
Shares sold 296,498 $7,602,541
75,807 $1,423,144
Shares issued on reinvestment 5,282 151,484
- -
- - --
Shares redeemed (66,546) (1,429,942)
(3,844) (70,678)
- ------------------------------------------------------------------
- ------------
- ------------------
Net Increase 235,234 $6,324,083
71,963 $1,352,466
==================================================================
=========
======
===============
Class Z
Shares sold 173,310 $4,892,235
- -
- - --
Shares issued on reinvestment 2,986 87,560
- -
- - --
Shares redeemed (179) (5,500)
- -
- - --
- ------------------------------------------------------------------
- ------------
- ------------------
Net Increase 176,117 $4,974,295
- -
- - --
==================================================================
=========
======
===============
</TABLE>
* For Class Z shares, transactions are for the period from
October 2, 1995
(inception date) to December 31, 1995.
16
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights
- ------------------------------------------------------------------
- ------------
- --
For a share of each class of capital stock outstanding throughout
each year:
<TABLE>
<CAPTION>
Class A Shares 1995
1994(1)
1993(1) 1992(2)
==================================================================
=========
======
=======================
<S> <C>
<C>
<C> <C>
Net Asset Value, Beginning of Year $19.10
$20.23
$15.47 $14.13
- ------------------------------------------------------------------
- ------------
- --------------------------
Income (Loss) From Operations:
Net investment loss (0.27)
(0.13)
(0.08) (0.01)
Net realized and unrealized gain (loss) 12.37
(1.00)
5.17 1.35
- ------------------------------------------------------------------
- ------------
- --------------------------
Total Income (Loss) From Operations 12.10
(1.13)
5.09 1.34
- ------------------------------------------------------------------
- ------------
- --------------------------
Less Distributions From:
Net realized gains (0.76)
- --
(0.33) --
- ------------------------------------------------------------------
- ------------
- --------------------------
Total Distributions (0.76)
- --
(0.33) --
- ------------------------------------------------------------------
- ------------
- --------------------------
Net Asset Value, End of Year $30.44
$19.10
$20.23 $15.47
- ------------------------------------------------------------------
- ------------
- --------------------------
Total Return 63.48%
(5.59)%
32.90% 9.48%++
- ------------------------------------------------------------------
- ------------
- --------------------------
Net Assets, End of Year (000s) $159,316
$101,052
$50,121 $195
- ------------------------------------------------------------------
- ------------
- --------------------------
Ratios to Average Net Assets:
Expenses 1.43%
1.49%
1.67% 1.51%+
Net investment loss (1.05)
(0.94)
(0.46) (0.97)+
- ------------------------------------------------------------------
- ------------
- --------------------------
Portfolio Turnover Rate 113%
123%
112% 211%
==================================================================
=========
======
=======================
Average commissions paid on
equity security transactions (3) $0.06
- --
- -- --
==================================================================
=========
======
==========================================
<CAPTION>
Class B Shares 1995
1994(1)
1993(1) 1992 1991
==================================================================
=========
======
=======================================
<S> <C>
<C>
<C> <C> <C>
Net Asset Value, Beginning of Year $18.82
$20.08
$15.47 $14.18 $9.82
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.37)
(0.27)
(0.20) (0.26) (0.07)
Net realized and unrealized gain (loss) 12.07
(0.99)
5.14 1.55 4.46
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Total Income (Loss) From Operations 11.70
(1.26)
4.94 1.29 4.39
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Less Distributions From:
Net realized gains (0.76)
- --
(0.33) -- --
Capital --
- --
- -- -- (0.03)
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Total Distributions (0.76)
- --
(0.33) -- (0.03)
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Net Asset Value, End of Year $29.76
$18.82
$20.08 $15.47 $14.18
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Total Return 62.30%
(6.27)%
31.93% 9.10% 44.76%
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Net Assets, End of Year (000s) $171,081
$93,920
$138,401 $78,130
$81,618
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Ratios to Average Net Assets:
Expenses 2.04%
2.21%
2.34% 2.32% 2.31%
Net investment loss (1.61)
(1.66)
(1.13) (1.77) (0.74)
- ------------------------------------------------------------------
- ------------
- ------------------------------------------
Portfolio Turnover Rate 113%
123%
112% 211% 379%
==================================================================
=========
======
=======================================
Average commissions paid on
equity security transactions (3) $0.06
- --
- -- -- --
==================================================================
=========
======
=======================================
</TABLE>
(1) The 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 method did not accord with results of
operations.
(2) For the period from November 6, 1992 (inception date) to
December 31,
1992.
(3) New SEC disclosure guidelines require that average commissions
per share
be
calculated and presented for the current year only. ++Total
return is not
annualized, as it may not be representative of the total
return for the
year.
+ Annualized.
17
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights (continued)
- ------------------------------------------------------------------
- ------------
- --
For a share of each class of capital stock outstanding throughout
each year:
<TABLE>
<CAPTION>
Class
C Shares
Class Z Shares
---------------
- ------------
- --- --------------
1995
1994(1)
1993(1)(2) 1995(3)
==================================================================
=========
======
=====================
<S> <C>
<C>
<C> <C>
Net Asset Value, Beginning of Year $18.82
$20.08
$22.62 $26.49
- ------------------------------------------------------------------
- ------------
- -----------------------
Income (Loss) From Operations:
Net investment loss (0.42)
(0.25)
(0.16) (0.06)
Net realized and unrealized gain (loss) 12.13
(1.01)
(2.05) 4.79
- ------------------------------------------------------------------
- ------------
- -----------------------
Total Income (Loss) From Operations 11.71
(1.26)
(2.21) 4.73
- ------------------------------------------------------------------
- ------------
- -----------------------
Less Distributions From:
Net realized gains (0.76)
- --
(0.33) (0.76)
- ------------------------------------------------------------------
- ------------
- -----------------------
Total Distributions (0.76)
- --
(0.33) (0.76)
- ------------------------------------------------------------------
- ------------
- -----------------------
Net Asset Value, End of Year $29.77
$18.82
$20.08 $30.46
- ------------------------------------------------------------------
- ------------
- -----------------------
Total Return 62.35%
(6.27)%
(9.77)%++ 17.95++
- ------------------------------------------------------------------
- ------------
- -----------------------
Net Assets, End of Year (000s) $9,417
$1,528
$185 $5,364
- ------------------------------------------------------------------
- ------------
- -----------------------
Ratios to Average Net Assets:
Expenses 2.25%
2.15%
2.19%+ 1.10%+
Net investment loss (1.79)
(1.60)
(0.98)+ (0.86)+
- ------------------------------------------------------------------
- ------------
- -----------------------
Portfolio Turnover Rate 113%
123%
112% 113%
==================================================================
=========
======
====================
Average commissions paid on
equity security transactions (4) $0.06
- --
- -- $0.06
==================================================================
=========
======
====================
</TABLE>
(1) The 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 method did not accord with results of
operations.
(2) For the period from October 18, 1993 (inception date) to
December 31,
1993.
(3) For the period from October 2, 1995 (inception date) to
December 31, 1995.
(4) New SEC disclosure guidelines require that average commissions
per share
be
calculated and presented for the current year only. ++Total
return is not
annualized, as it may not be representative of the total
return for the
year.
+ Annualized.
18
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Independent Auditors' Report
- ------------------------------------------------------------------
- ------------
- --
The Shareholders and Board of Trustees of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and
liabilities,
including the schedule of investments, of the Smith Barney
statement of
Special
Equities Fund of Smith Barney Investment Funds Inc. as of December
31, 1995,
and
the related statement of operations, statement of changes in net
assets, and
financial highlights for the year then ended. These financial
statements and
financial highlights are the responsibility of the Fund's
management. Our
responsibility is to express an opinion on these financial
statements and
financial highlights based on our audit. The statement of changes
in net
assets
for the year ended December 31, 1994 and the financial highlights
for each of
the years in the four-year period then ended were audited by other
auditors
whose report thereon, dated February 10, 1995, expressed an
unqualified
opinion
on that statement of changes in net assets and those financial
highlights.
We conducted our audit in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain
reasonable assurance about whether the financial statements and
financial
highlights are free of material misstatement. An audit includes
examining, on
a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities
owned as of
December 31, 1995, by correspondence with the custodian. As to
securities
purchased and sold but not received or delivered, we performed
other
appropriate
auditing procedures. An audit also includes assessing the
accounting
principles
used and significant estimates made by management, as well as
evaluating the
overall financial statement presentation. We believe that our
audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present
fairly,
in all material respects, the financial position of the Smith
Barney Special
Equities Fund of Smith Barney Investment Funds as of December 31,
1995, and
the
results of its operations, changes in its net assets and its
financial
highlights for the year then ended, in conformity with generally
accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 16, 1996
19
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Additional Information
- ------------------------------------------------------------------
- ------------
- --
Change in Independent Auditor: On October 20, 1995, based
upon the
recommendation of the Audit Committee of the Fund, the Board of
Directors
determined not to retain Coopers & Lybrand L.L.P. ("Coopers &
Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick
LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit
reports
contained no adverse opinion or disclaimer of opinion; nor were
the reports
qualified or modified as to uncertainty, audit scope, or
accounting
principles.
Further, during this same period there were no disagreements with
Coopers &
Lybrand on any matter of accounting principles or practices,
financial
statement
disclosure, or auditing scope or procedure, which disagreements,
if not
resolved
to the satisfaction of Coopers & Lybrand, would have caused it to
make
reference
to the subject matter of such disagreements in connection with its
audit
reports. The Fund has requested Coopers & Lybrand to provide a
letter to the
Securities and Exchange Commission stating whether Coopers &
Lybrand agrees
with
the foregoing statements, and to provide the Fund with a copy of
such letter.
A
copy of this letter is available upon request by calling the Fund
at (212)
723-9218.
- ------------------------------------------------------------------
- ------------
- --
Tax Information (unaudited)
- ------------------------------------------------------------------
- ------------
- --
The amount of long-term capital gains paid by the Fund to its
shareholders
for the fiscal year ended December 31, 1995, was $7,592,812.
20
<PAGE>
Smith Barney
SMITH
BARNEY
Special Equities
- ----------
- --
Fund A Member of
Travelers Group
[LOGO]
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
George V. Novello
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the
shareholders of
Smith Barney Special Equities Fund. It is not authorized for
distribution to
prospective investors unless accompanied or preceded by a current
Prospectus
for
the Fund, which contains information concerning the Fund's
investment policies
and expenses as well as other pertinent information.
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
FD0313 2/96
PROSPECTUS
SMITH
BARNEY
Special
Equities
Fund
APRIL 29,
1996
Prospectus
begins on page
one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Prospectus
April 29,
1996
- ------------------------------------------------------------------
- ------------
- --
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 April 29, 1996 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
- ------------------------------------------------------------------
- ------------
- --
Prospectus Summary
3
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights
11
- ------------------------------------------------------------------
- ------------
- --
Investment Objective and Management Policies
15
- ------------------------------------------------------------------
- ------------
- --
Valuation of Shares
18
- ------------------------------------------------------------------
- ------------
- --
Dividends, Distributions and Taxes
19
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares
21
- ------------------------------------------------------------------
- ------------
- --
Exchange Privilege
31
- ------------------------------------------------------------------
- ------------
- --
Redemption of Shares
35
- ------------------------------------------------------------------
- ------------
- --
Minimum Account Size
38
- ------------------------------------------------------------------
- ------------
- --
Performance
38
- ------------------------------------------------------------------
- ------------
- --
Management of the Company and Fund
39
- ------------------------------------------------------------------
- ------------
- --
Distributor
40
- ------------------------------------------------------------------
- ------------
- --
Additional Information
41
- ------------------------------------------------------------------
- ------------
- --
==================================================================
=========
=====
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 and
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 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.
In addition, a fifth class, Class Z shares, which is offered
pursuant to a
separate prospectus, is offered exclusively to tax-exempt employee
benefit and
retirement plans of Smith Barney Inc. ("Smith Barney")and its
affiliates. 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 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.
4
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Prospectus Summary (continued)
- ------------------------------------------------------------------
- ------------
- --
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, First Data Investor Services
Group, Inc.
("FDISG"), formerly known as The Shareholders Services Group. 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 and administrator. 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
Travelers Group
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. 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.
Certain
exchanges
may be subject to a 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 unless otherwise specified by an
investor in
additional shares of the same Class at current net asset value .
Shares
acquired
by dividend and distribution reinvestments will not be subject to
any sales
charge or CDSC. Class B shares acquired through dividend and
distribution
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 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:
Class A Class B
Class C Class
Y
- ------------------------------------------------------------------
- ------------
- --
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*** 0.43% 0.29%
0.50%
0.43%
- ------------------------------------------------------------------
- ------------
- --
TOTAL FUND OPERATING EXPENSES 1.43% 2.04%
2.25%
1.18%
==================================================================
=========
=====
* 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 no Class Y shares were
outstanding
during the fiscal year ended December 31, 1995.
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, consisting of a 0.75%
distribution fee and
a
0.25% service fee.
9
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Prospectus Summary (continued)
- ------------------------------------------------------------------
- ------------
- --
"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 Fund."
1 Year 3 Years 5
Years 10
Years*
- ------------------------------------------------------------------
- ------------
- --
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and (2)
redemption at the end of each time
period:
Class A $64 $93
$124 $213
Class B 71 94
120 221
Class C 33 70
120 258
Class Y 12 37
65 143
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A 64 93
124 213
Class B 21 64
110 221
Class C 23 70
120 258
Class Y 12 37
65 143
==================================================================
=========
=====
* Ten-year figures assume conversion of Class B shares to Class
A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare
expense
levels of funds with different fee structures over varying
investment periods.
To facilitate such comparison, all funds are required to utilize a
5.00%
annual
return assumption. However, the Fund's actual return will vary and
may be
greater or less than 5.00%. This example should not be considered
a
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 for the fiscal year ended December 31,
1995 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon
appears in the Fund's Annual Report dated December 31, 1995. The
following
information for the fiscal years ended December 31, 1986 through
December 31,
1994 has been audited by other auditors. 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. No information is presented
for Class Y
shares because no Class Y shares were outstanding for the periods
shown. For a
Class A share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994(1)
1993(1) 1992(2)
==================================================================
=========
======
===============
<S> <C> <C>
<C>
<C>
Net Asset Value, Beginning of Year $ 19.10 $ 20.23
$
15.47 $ 14.13
- ------------------------------------------------------------------
- ------------
- ------------------
Income (Loss) From Operations:
Net investment loss (0.27) (0.13)
(0.08) (0.01)
Net realized and unrealized gain (loss) 12.37 (1.00)
5.17 1.35
- ------------------------------------------------------------------
- ------------
- -----------------
Total Income (Loss) From Operations 12.10 (1.13)
5.09 1.34
- ------------------------------------------------------------------
- ------------
- -----------------
Less Distributions From:
Net realized gains (0.76) --
(0.33) --
- ------------------------------------------------------------------
- ------------
- -----------------
Total Distributions (0.76) --
(0.33) --
- ------------------------------------------------------------------
- ------------
- -----------------
Net Asset Value, End of Year $ 30.44 $ 19.10
$
20.23 $ 15.47
- ------------------------------------------------------------------
- ------------
- -----------------
Total Return++ 63.48%
(5.59)%
32.90% 9.48%##
- ------------------------------------------------------------------
- ------------
- -----------------
Net Assets, End of Year (000s) $159,316 $101,052
$
50,121 $ 195
- ------------------------------------------------------------------
- ------------
- -----------------
Ratios to Average Net Assets:
Expenses 1.43% 1.49%
1.67% 1.51%+
Net investment loss (1.05) (0.94)
(0.46) (0.97)+
- ------------------------------------------------------------------
- ------------
- -----------------
Portfolio Turnover Rate 113% 123%
112% 211%
==================================================================
=========
======
==============
Average commissions paid on
equity security transactions (3) $ 0.06 --
- --
- --
==================================================================
=========
======
==============
</TABLE>
(1) The per share amounts have been calculated using the monthly
average
shares
method, which more appropriately presents the per share data
for this
year
since use of the undistributed method did not accord with
results of
operations.
(2) For the period from November 6, 1992 (inception date) to
December 31,
1992.
(3) New SEC disclosure guidelines require that average
commissions per share
be
calculated and presented for the current year only.
++ Total return represents the aggregate total return for the
period
indicated
and does not reflect any applicable sales charges.
## Total return is not annualized, as it may not be
representative of the
total return for the year.
+ Annualized
11
<PAGE>
Smith Barney Special Equities Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Financial Highlights (continued)
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
For a Class B share of capital stock outstanding throughout each
year:
1995 1994(1) 1993(1) 1992
1991
1990 1989 1988 1987
1986
==================================================================
=========
======
===================================================
<S> <C> <C> <C> <C>
<C>
<C> <C> <C> <C>
<C>
Net Asset Value,
Beginning of Year $ 18.82 $ 20.08 $ 15.47 $ 14.18
$ 9.82
$ 13.77 $ 12.04 $ 11.48 $
13.02 $
13.15
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Income (Loss) From
Operations:
Net investment loss (0.37) (0.27) (0.20) (0.26)
(0.07)
0.29 0.28 0.71++ (0.10)
(0.05)
Net realized and
unrealized gain
(loss) 12.07 (0.99) 5.14 1.55
4.46
(3.70) 1.96 0.70 (1.30)
0.97
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Total Income (Loss)
From Operations 11.70 (1.26) 4.94 1.29
4.39
(3.41) 2.24 1.41 (1.40)
0.92
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Less Distributions From:
Net realized gains (0.76) -- (0.33) --
- --
(0.23) -- (0.30) (0.14) (1.00)
Capital -- -- -- --
(0.03)
(0.02) (0.24) -- -- --
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Total Distributions (0.76) -- (0.33) --
(0.03)
(0.54) (0.51) (0.85) (0.14)
(1.05)
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Net Asset Value,
End of Year $ 29.76 $ 18.82 $ 20.08 $ 15.47
$ 14.18
$ 9.82 $ 13.77 $ 12.04 $
11.48 $
13.02
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Total Return+ 62.30% (6.27)% 31.93% 9.10%
44.76%
(24.71)% 18.60%
12.60%
(10.91)% 7.05%
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Net Assets,
End of Year (000's) $171,081 $ 93,920 $138,401 $ 78,130
$ 81,618
$ 76,009 $141,630
$169,983
$178,905 $214,419
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Ratios to Average
Net Assets:
Expenses 2.04% 2.21% 2.34% 2.32%
2.31%
2.30% 2.34% 2.32%
2.09%
2.12%
Net investment (loss) (1.61) (1.66) (1.13) (1.77)
(0.74)
2.12 1.69 5.23 (0.63)
(0.34)
- ------------------------------------------------------------------
- ------------
- ----------------------------------------------------
- --
Portfolio Turnover Rate 113% 123% 112% 211%
379%
372% 228% 165%
148% 114%
==================================================================
=========
======
===================================================
Average commissions
paid on equity security
transactions(2) $ 0.06 -- -- --
- --
- -- -- -- -- --
==================================================================
=========
======
===================================================
</TABLE>
(1) The 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 did not accord with
results of
operations.
(2) New SEC disclosure guidelines require that average
commissions per share
be
calculated and presented for the current year only.
+ Total return represents the aggregate total return for the
period
indicated
and does not reflect any applicable sales charges.
++ 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.
12
13
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Financial Highlights (continued)
- ------------------------------------------------------------------
- ------------
- --
For a Class C share of capital stock outstanding throughout each
year:
Class C Shares 1995 1994(1)
1993(1)(2)
==================================================================
=========
==
Net Asset Value, Beginning of Year $18.82 $20.08
$22.62
- ------------------------------------------------------------------
- -----------
Income From Operations:
Net investment loss (0.42) (0.25)
(0.16)
Net realized and unrealized gain (loss)
on investments 12.13 (1.01)
(2.05)
- ------------------------------------------------------------------
- -----------
Total Income (Loss) From Operations 11.71 (1.26)
(2.21)
- ------------------------------------------------------------------
- -----------
Less Distributions From:
Net investment income (0.76) --
(0.33)
Net realized gains -- --
- --
- ------------------------------------------------------------------
- -----------
Total Distributions (0.76) --
(0.33)
- ------------------------------------------------------------------
- -----------
Net Asset Value, End of Year $29.77 $18.82
$20.08
- ------------------------------------------------------------------
- -----------
Total Return++ 62.35% (6.27)%
(9.77)%##
- ------------------------------------------------------------------
- -----------
Net Assets, End of Year (000s) $9,417 $1,528
$ 185
- ------------------------------------------------------------------
- -----------
Ratios to Average Net Assets:
Expenses 2.25% 2.15%
2.19%+
Net investment loss (1.79) (1.60)
(0.98)+
- ------------------------------------------------------------------
- -----------
Portfolio Turnover Rate 113% 123%
112%
==================================================================
=========
==
Average commissions paid
on equity security transactions(3) $0.06 --
- --
==================================================================
=========
==
(1) For the period from October 18, 1993 (inception date) to
December 31,
1993.
(2) The per share amounts have been calculated using the monthly
average
shares
method, which more appropriately presents the per share data
for this
period, since use of the undistributed net investment income
method does
not accord with results of operations.
(3) New SEC disclosure guidelines require that average
commissions per share
be
calculated and presented for the current year only.
++ Total return represents the aggregate total return for the
period
indicated
and does not reflect any applicable sales charge.
## Total return is not annualized, as it may not be
representative of the
total return for the year.
+ Annualized.
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 attempts to achieve its investment objective by
investing
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 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
15
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------
- ------------
- --
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
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
16
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------
- ------------
- --
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, 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.
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.
17
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------
- ------------
- --
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."
- ------------------------------------------------------------------
- ------------
- --
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
18
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Valuation of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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.
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.
19
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Dividends, Distributions and Taxes (continued)
- ------------------------------------------------------------------
- ------------
- --
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.
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 more 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
20
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Dividends, Distributions and Taxes (continued)
- ------------------------------------------------------------------
- ------------
- --
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.
- ------------------------------------------------------------------
- ------------
- --
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 (except
for purchases of Class Y shares by Smith Barney Concert Series
Inc., for which
there is no minimum purchase amount). The Fund also offers a fifth
class of
share: Class Z shares, which are offered without a sales charge,
CDSC, service
fee or distribution fee, exclusively to tax-exempt employee
benefit and
retirement plans of Smith Barney and its affiliates. Investors
meeting these
criteria who are interested in acquiring Class Z shares should
contact a Smith
Barney Financial Consultant for a Class Z shares Prospectus. See
"Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of
factors to
consider in selecting which Class of shares to purchase.
Shares may be purchased through a brokerage account
maintained with Smith
Barney. Shares may also be purchased through an Introducing Broker
or an
investment dealer in the selling group. In addition, certain
investors,
including qualified retirement plans and certain other
institutional
investors,
may purchase shares directly through FDISG. 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,
21
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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, FDISG. Share certificates are issued only upon a
shareholder's
written request to FDISG.
Purchase orders received by the Fund or Smith Barney prior to
the close
of
regular trading on the NYSE, on any day the Fund calculates its
net asset
value,
are priced according to the net asset value determined on that day
(the "trade
date"). 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.
For
shares purchased through Smith Barney or Introducing Brokers
purchasing
through
Smith Barney, payment for Fund shares is due on the third business
day after
the
trade date. In all other cases, payment must be made with the
purchase order.
Systematic Investment Plan
Shareholders may make additions to their accounts at any time
by
purchasing
shares through a service known as the Systematic Investment Plan.
Under the
Systematic Investment Plan, Smith Barney or FDISG 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 FDISG. 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.
22
<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:
Sales
Dealers
Sales Charge as Charge as
Reallowance
% of % of
as % of
Amount of Investment Offering Price Amount Invested
Offering
Price
==================================================================
=========
=====
Less than $25,000 5.00% 5.26%
4.50%
$25,000 - $49,999 4.00% 4.17%
3.60%
$50,000 - $99,999 3.50% 3.63%
3.15%
$100,000 - $249,999 3.00% 3.09%
2.70%
$250,000 - $499,999 2.00% 2.04%
1.80%
$500,000 and over * *
*
==================================================================
=========
=====
* Purchases of Class A shares, which when combined with current
holdings of
Class A shares offered with a sales charge equal or exceed
$500,000 in
the
aggregate, will be made at net asset value without any
initial sales
charge, but will be subject to a CDSC of 1.00% on redemptions
made within
12 months of purchase. The CDSC on Class A shares is payable
to Smith
Barney, which compensates Smith Barney Financial Consultants
and other
dealers whose clients make purchases of $500,000 or more. The
CDSC is
waived in the same circumstances in which the CDSC applicable
to Class B
and Class C shares is waived. See "Deferred Sales Charge
Alternatives"
and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of the
sales charge
and
may be deemed to be underwriters of the Fund as defined in the
Securities Act
of
1933, as amended.
The reduced sales charges shown above apply to the aggregate
of purchases
of Class A shares of the Fund made at one time by "any person,"
which includes
an individual, his or her spouse and children, or a trustee or
other fiduciary
of a single trust estate or single fiduciary account. The reduced
sales charge
minimums may also be met by aggregating the purchase with the net
asset value
of
all Class A shares held in funds sponsored by Smith Barney that
are offered
with
a sales charge listed under "Exchange Privilege."
23
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
Initial Sales Charge Waivers
Purchase of Class A shares may be made at net asset value
without a sales
charge in the following circumstances:(a) sales to (i) Directors,
Trustees,
and
employees of Travelers and its subsidiaries and any of the Smith
Barney Mutual
Funds; the immediate families of such persons; and to a pension,
profit-
sharing
or other benefit plan for such persons and (ii)employees of
members of the
National Association of Securities Dealers, Inc. provided such
sales are made
upon the assurance of the purchaser that the purchase is made for
investment
purposes and that the securities will not be resold except through
redemption
or
repurchase; (b) offers of Class A shares to any other investment
company 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.
24
<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.
Letter of Intent
Class A Shares. A Letter of Intent for amounts of $50,000 or
more
provides
an opportunity for an investor to obtain a reduced sales charge by
aggregating
investments over a 13 month period, provided that the investor
refers to such
Letter
25
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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 FDISG to obtain a Letter of
Intent
application.
Class Y Shares. A Letter of Intent may also be used as a way
for
investors
to meet the minimum investment requirement for Class Y shares.
Such investors
must make an initial minimum purchase of $1,000,000 in Class Y
shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares
of the same
Fund within six months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six-month period, all Class Y
shares
purchased
to date will be transferred to Class A shares, where they will be
subject to
all
fees (including a service fee of 0.25%) and expenses applicable to
the Fund's
Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such
transfer will not be subject to Federal income taxes. Please
contact a Smith
Barney Financial Consultant or FDISG for further information
Deferred Sales Charge Alternatives
"CDSC Shares" are sold at net asset value next determined
without an
initial sales charge so that the full amount of an investor's
purchase payment
may be immediately invested in the Fund. A CDSC, however, may be
imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class
B shares;
(b)
Class C shares; and (c) Class A shares which when combined with
Class A shares
offered with a sales charge currently held by an investor equal or
exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to
the lesser of
the 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
26
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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."
Year Since Purchase
Payment Was Made
CDSC
- ------------------------------------------------------------------
- ------------
- --
First
5.00%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
- ------------------------------------------------------------------
- ------------
- --
Class B shares will convert automatically to Class A shares
eight years
after the date on which they were purchased and thereafter will no
longer be
subject to any distribution 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
27
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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."
In determining the applicability of any CDSC, it will be
assumed that a
redemption is made first of shares representing capital
appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
and finally of other shares held by the shareholder for the
longest period of
time. The length of time that 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 "Automatic Cash Withdrawal Plan") (provided, however, that
automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of
the
shareholder's shares will be permitted for withdrawal plans that
were
established prior to November 7, 1994); (c) redemptions of shares
within 12
months following the death or disability of the shareholder; (d)
redemption of
shares made in connection with qualified distributions from
retirement plans
or
IRAs upon the
28
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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
FDISG 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.
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
29
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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
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
30
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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.
Participating Plans wishing to acquire shares of the Fund
through the
Smith
Barney 401(k) Program must purchase such shares directly from
FDISG. 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.
31
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------
- ------------
- --
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 Natural Resources Fund Inc.
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account 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 Intermediate Maturity California Municipals
Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* 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
32
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------
- ------------
- --
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 Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond
Portfolio
Smith Barney World Funds, Inc. -- International Balanced
Portfolio
Smith Barney World Funds, Inc. -- International Equity
Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney 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 Smith Barney Mutual
Funds sold
without
a sales charge or with a maximum sales charge of less than the
maximum
33
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------
- ------------
- --
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
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
34
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------
- ------------
- --
for a significant period of time. All relevant factors will be
considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange
Program."
Exchanges will be processed at the net asset value next
determined, 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
shareholder's
account is not with Smith Barney, from the shareholder directly.
The
redemption
proceeds will be remitted on or before the third day following
receipt of
proper
tender, except on any days on which the NYSE is closed or as
permitted under
the
1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds
are remitted to a 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
35
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
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 Special Equities Fund, Inc.
Class A, B, C or Y (please specify)
c/o First Data Investors 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 FDISG together with the redemption request.
Any signature
appearing on a written redemption request in excess of $2,000,
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.
Written redemption requests of $2,000 or less do not require a
signature
guarantee unless more than one such redemption request is made in
any 10-day
period or the redemption proceeds are to be sent to an address
other than the
address of record. Unless otherwise directed, redemption proceeds
will be
mailed
to an investor's address of record. FDISG 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 FDISG 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
36
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
subject to the CDSC at the time the withdrawal plan commences. For
further
information regarding the automatic cash withdrawal plan,
shareholders should
contact a Smith Barney Financial Consultant.
Telephone Redemption and Exchange Program
Shareholders who do not have a Smith Barney brokerage account
may be
eligible to redeem and exchange Fund shares by telephone. To
determine if a
shareholder is entitled to participate in this program, he or she
should
contact
FDISG at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must
complete and return a Telephone/Wire Authorization Form, along
with a
signature
guarantee that will be provided by FDISG upon request.
(Alternatively, an
investor may authorize telephone redemptions on the new account
application
with
the applicant's signature guarantee when making his/her initial
investment in
the Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes
of the Fund's shares may be made by eligible shareholders by
calling FDISG at
1-800-451-2010. Such requests may be made between 9:00 a.m. and
5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests
received
after
the close of regular trading on the NYSE are priced at the net
asset value
next
determined. Redemptions of shares (i) by retirement plans or (ii)
for which
certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption
proceeds
mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed or
wired, as the
case
may be, on the next business day following the redemption request.
In order to
use the wire procedures, the bank receiving the proceeds must be a
member of
the
Federal Reserve System or have a correspondent with a member bank.
The Fund
reserves the right to charge shareholders a nominal fee for each
wire
redemption. Such charges, if any, will be assessed against the
shareholder's
account from which shares were redeemed. In order to change the
bank account
designated to receive redemption proceeds, a shareholder must
complete a new
Telephone/Wire Authorization Form and, for the protection of the
shareholder's
assets, will be required to provide a signature guarantee and
certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being acquired is
identical to
the registration of the shares of the fund exchanged. Such
exchange requests
may
be made by calling FDISG at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m.
(New
York City time) on any day on which the NYSE is open. Exchange
requests
37
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------
- ------------
- --
received after the close of regular trading on the NYSE are
processed at the
net
asset value next determined.
Additional Information regarding Telephone Redemption and
Exchange
Program.
Neither the Fund nor its agents will be liable for following
instructions
communicated by telephone that are reasonably believed to be
genuine. The Fund
and its agents will employ procedures designed to verify the
identity of the
caller and legitimacy of instructions (for example, a
shareholder's name and
account number will be required and phone calls may be recorded).
The Fund
reserves the right to suspend, modify or discontinue the telephone
redemption
and exchange program or to impose a charge for this service at any
time
following at least seven (7) days' prior notice to shareholders.
- ------------------------------------------------------------------
- ------------
- --
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
38
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Performance (continued)
- ------------------------------------------------------------------
- ------------
- --
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 Class' current return to yields
published for
other
investment companies and other investment vehicles. The Fund may
also include
comparative performance information in advertising or marketing
its shares.
Such
performance information may include data from Lipper Analytical
Services, Inc.
and other financial publications.
- ------------------------------------------------------------------
- ------------
- --
Management of the 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, custodian and transfer agent. The day-to-
day
operations
of the Fund are delegated to the Fund's investment adviser and
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. SBMFM (through predecessor
entities) has been
in
the investment counseling business since 1940. SBMFM renders
investment advice
to a wide variety of individual, institutional and investment
company clients
which had aggregate assets under management as of January 31, 1996
in excess
of
$74 billion.
39
<PAGE>
Smith Barney Special Equities 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 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, 1995
is included
in
the Fund's Annual Report dated December 31, 1995. 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.
- ------------------------------------------------------------------
- ------------
- --
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
40
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Distributor (continued)
- ------------------------------------------------------------------
- ------------
- --
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
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 five
Classes, A, B, C,
Y
and Z, 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
41
<PAGE>
Smith Barney Special Equities Fund
- ------------------------------------------------------------------
- ------------
- --
Additional Information (continued)
- ------------------------------------------------------------------
- ------------
- --
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.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia,
PA 19103,
serves as custodian of the Fund's investments.
FDISG, located at Exchange Place, Boston, Massachusetts
02109, 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 accounts should contact
their Smith
Barney Financial Consultants or FDISG
42
<PAGE>
(This page intentionally left blank.)
43
<PAGE>
(This page intentionally left blank.)
44
<PAGE>
SMITH
BARNEY
- ----------
- --
A Member of
Travelers
Group[Logo]
Smith
Barney
Special
Equities
Fund
388
Greenwich
Street
New York,
New York
10013
FD 0232
4/96
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME
FUND SMITH BARNEY AGGRESSIVE GROWTH FUND INC.
SMITH BARNEY APPRECIATION FUND INC.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC. SMITH
BARNEY CALIFORNIA MUNICIPALS FUND
INC. SMITH BARNEY CONCERT SERIES INC. SMITH
BARNEY CONVERTIBLE FUND
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
FUND SMITH BARNEY FUNDAMENTAL VALUE FUND
INC. SMITH BARNEY FUNDS, INC.
SMITH BARNEY GOVERNMENT SECURITIES FUND
SMITH BARNEY GROWTH AND INCOME FUND SMITH
BARNEY GROWTH OPPORTUNITY FUND SMITH BARNEY
HIGH INCOME FUND
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS FUND SMITH BARNEY INTERMEDIATE
MATURITY NEW YORK MUNICIPALS FUND SMITH
BARNEY INVESTMENT GRADE BOND FUND
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
SMITH BARNEY MANAGED GROWTH FUND
SMITH BARNEY MANAGED MUNICIPALS FUND INC.
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
SMITH BARNEY NATURAL RESOURCES FUND INC.
SMITH BARNEY NEW JERSEY MUNICIPALS FUND INC.
SMITH BARNEY OREGON MUNICIPALS FUND SMITH
BARNEY PREMIUM TOTAL RETURN FUND SMITH BARNEY
SPECIAL EQUITIES FUND
SMITH BARNEY STRATEGIC INVESTORS FUND SMITH
BARNEY TAX-EXEMPT INCOME FUND SMITH BARNEY
UTILITIES FUND
SMITH BARNEY WORLD FUNDS, INC.
Supplement dated July 12, 1996 to Prospectuses* The
following information supplements the section of
the Prospectus
of each of the funds listed above entitled "Purchase of Shares -
Initial
Sales Charge Waivers":
Purchases of Class A shares also may be made at
net asset
value without a sales charge in the following circumstances:
(1)
direct rollovers by plan participants of distributions from a
401(k) plan
enrolled in the Smith Barney 401(k) Program (Note: Subsequent
investments will be subject to the applicable sales charge); (2)
purchases by separate accounts used to fund certain unregistered
variable annuity contracts; and (3) purchases by investors
participating in a Smith Barney fee based arrangement.
________________
* Prospectuses dated:
<TABLE>
<S> <C>
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUNDOctober
1, 1995
SMITH BARNEY AGGRESSIVE GROWTH FUND INC. December 29, 1995
SMITH BARNEY APPRECIATION FUND INC. March 1, 1996
SMITH BARNEY ARIZONA MUNICIPALS FUND INC. July 30, 1995
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.June 3, 1996
SMITH BARNEY CONCERT SERIES INC. February 5, 2996
SMITH BARNEY CONVERTIBLE FUND November 28,
1995
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUNDNovember 28,
1995
SMITH BARNEY FUNDAMENTAL VALUE FUND INC. February 1,
1996
SMITH BARNEY FUNDS, INC. April 1, 1996
SMITH BARNEY GOVERNMENT SECURITIES FUND April 29,
1996
SMITH BARNEY GROWTH AND INCOME FUND April 22,
1996
SMITH BARNEY GROWTH OPPORTUNITY FUND April 29,
1996
SMITH BARNEY HIGH INCOME FUND November 28,
1996
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS FUND March 22,
1996
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK
MUNICIPALS FUND March 22,
1996
SMITH BARNEY INVESTMENT GRADE BOND FUND June 24, 1996
SMITH BARNEY MANAGED GOVERNMENTS FUND INC. November 29, 1995
SMITH BARNEY MANAGED GROWTH FUND April 29,
1996
SMITH BARNEY MANAGED MUNICIPALS FUND INC. May 6, 1996
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND January 29, 1996
SMITH BARNEY NATURAL RESOURCES FUND INC. January 5,
1996
SMITH BARNEY NEW JERSEY MUNICIPALS FUND INC.June 1, 1996
SMITH BARNEY OREGON MUNICIPALS FUND June 29, 1995
SMITH BARNEY PREMIUM TOTAL RETURN FUND November 28,
1995
SMITH BARNEY SPECIAL EQUITIES FUND April 29,
1996
SMITH BARNEY STRATEGIC INVESTORS FUND April 22,
1996
SMITH BARNEY TAX-EXEMPT INCOME FUND November 28,
1995
SMITH BARNEY UTILITIES FUND November 28,
1995
SMITH BARNEY WORLD FUNDS, INC. February 28,
1996
</TABLE>
SMITH BARNEY
ADJUSTABLE RATE HIGH GROWTH
GOVERNMENT INCOME PORTFOLIO
FUND (CLASS A ONLY) HIGH INCOME
FUND
AGGRESSIVE GROWTH FUND INCOME
PORTFOLIO
INC. INTERNATIONAL
APPRECIATION FUND INC. BALANCED
PORTFOLIO
BALANCED PORTFOLIO INTERNATIONAL
CASH PORTFOLIO (CLASS A EQUITY
PORTFOLIO
ONLY) INVESTMENT
GRADE
CONVERTIBLE FUND BOND FUND
CONSERVATIVE PORTFOLIO MANAGED
DIVERSIFIED STRATEGIC GOVERNMENTS
FUND
INCOME FUND INC.
EMERGING MARKETS MANAGED
GROWTH
PORTFOLIO FUND
EUROPEAN PORTFOLIO NATURAL
RESOURCES
EQUITY INCOME PORTFOLIO FUND INC.
EXCHANGE RESERVE FUND PACIFIC
PORTFOLIO
FUNDAMENTAL VALUE FUND PREMIUM TOTAL
INC. RETURN FUND
GLOBAL GOVERNMENT SHORT-TERM U.S.
BOND PORTFOLIO TREASURY SECURITIES
GOVERNMENT PORTFOLIO PORTFOLIO
(CLASS A ONLY) SPECIAL EQUITIES FUND
GOVERNMENT SECURITIES STRATEGIC INVESTORS
FUND FUND
GROWTH AND INCOME FUND U.S. GOVERNMENT GROWTH
OPPORTUNITY SECURITIES
FUND PORTFOLIO
GROWTH PORTFOLIO UTILITIES FUND
SUPPLEMENT DATED JUNE 21, 1996 TO PROSPECTUSES*
<PAGE>
The following information replaces in its entirety the
disclosure in the
Prospectus of each of the funds listed above (each a "Fund") under
"Purchase of
Shares--Smith Barney 401(k) Program:"
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.
Each Fund offers to Participating Plans Class A and Class
C shares as
investment alternatives under the Smith Barney 401(k) Program.
Class A and
Class C shares acquired through the Smith Barney 401(k) Program are
subject to
the same service and/or distribution fees as the Class A and Class
C shares
acquired by other investors; however, they are not subject to any
initial sales
charge or contingent deferred sales charge ("CDSC"). Once a
Participating Plan
has made an initial investment in a 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 a Fund are offered
without any sales charge
or CDSC to any Participating Plan that purchases $1,000,000 or more
of Class A
shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of a Fund are offered
without any sales charge
or CDSC to any Participating Plan that purchases less than
$1,000,000 of Class
C shares of one or more funds of the Smith Barney Mutual
Funds.
Plans Opened On or After June 21, 1996. At the end of the
fifth year after
the date the Participating Plan enrolled in the Smith Barney 401(k)
Program, if
its total Class C holdings in all non-money market Smith Barney
Mutual Funds
equal at least $1,000,000, it will be offered the opportunity to
exchange all
of its Class C shares for Class A shares of a Fund. (For
Participating Plans
that were originally established through a Smith Barney retail
brokerage
account, the five year period will be calculated from the date the
retail
brokerage account was opened.) Such Plans will be notified of the
pending
exchange in writing within 30 days after the fifth anniversary of
the
enrollment date and, unless the exchange offer has been rejected in
writing,
the exchange will occur on or about the 90th day after the fifth
anniversary
date. If the Participating Plan does not qualify for the five year
exchange to
Class A shares, a review of the Plan's holdings will be performed
each quarter
until either the Plan qualifies or the end of the eighth year.
<PAGE>
Plans Opened Prior to June 21, 1996. In any year after the
date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if
its total
Class C holdings in all non-money market Smith Barney Mutual Funds
equal at
least $500,000 as of the calendar year-end, the Participating Plan
will be
offered the opportunity to exchange all of its Class C shares for
Class A
shares of a Fund. Such Plans will be notified in writing within 30
days after
the last business day of the calendar year and, unless the exchange
offer has
been rejected in writing, the exchange will occur on or about the
last business
day of the following March.
Any Participating Plan that has not previously qualified
for an exchange into
Class A shares will be offered the opportunity to exchange all of
its Class C
shares for Class A shares of a Fund, regardless of asset size, at
the end of
the eighth year after the date the Participating Plan enrolled in
the Smith
Barney 401(k) Program. Such Plans will be notified of the pending
exchange in
writing approximately 60 days before the eighth anniversary of the
enrollment
date and, unless the exchange has been rejected in writing,
the exchange will
occur on or about the eighth anniversary date. Once an exchange has
occurred, a
Participating Plan will not be eligible to acquire additional Class
C shares of
the Fund but instead may acquire Class A shares of the Fund. Any
Class C shares
not converted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of a Fund
through the Smith
Barney 401(k) Program must purchase such shares directly from the
Transfer
Agent. For further information regarding the Smith Barney 401(k)
Program,
investors should contact a Smith Barney Financial Consultant.
Class B Shares. Class B shares of the Smith Barney Mutual
Funds are not
available for purchase by Participating Plans opened on or after
June 21, 1996,
but may continue to be purchased by any Plan opened prior to such
date and
originally investing in such Class. Class B shares acquired are
subject to a
CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates
within eight years of the date the Participating Plan first
enrolled in the
Smith Barney 401(k) Program.
At the end of the eighth year after the date the Participating
Plan enrolled
in the Smith Barney 401(k) Program, it will be offered the
opportunity to
exchange all of its Class B shares for Class A shares of a 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 a Fund but
instead may
acquire Class A
<PAGE>
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" in each
Fund's prospectus.
No CDSC is imposed on redemptions of Class B shares to the
extent that the
net asset value of the shares redeemed does not exceed the current
net asset
value of the shares purchased through reinvestment of dividends or
capital gain
distributions, plus the current net asset value of Class B shares
purchased
more than eight years prior to the redemption, plus increases 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 the
redemption by 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 redemptions by 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 Class B shares
in connection with
lump-sum or other distributions made by a Participating Plan as a
result of:
(a) the retirement of an employee in the Participating Plan; (b)
the
termination of employment of an employee in the Participating Plan;
(c) the
death or disability of an employee in the Participating Plan; (d)
the
attainment of age 59 1/2 by an employee in the Participating Plan;
(e) hardship
of an employee in the Participating Plan to the extent permitted
under Section
401(k) of the Code; or (f) redemptions of shares in connection with
a loan made
by the Participating Plan to an employee.
- -----------
* Prospectuses dated:
<TABLE>
<S> <C>
Adjustable Rate Government Income Fund October 1, 1995 Aggressive
Growth Fund Inc. December 29, 1995
Appreciation Fund Inc. March 1, 1996
Balanced Portfolio February 5, 1996
Cash Portfolio February 16, 1996
Convertible Fund November 28, 1995
Conservative Portfolio February 5, 1996
Diversified Strategic Income Fund November 28, 1995
Emerging Markets Portfolio February 28, 1996
European Portfolio February 28, 1996
Equity Income Portfolio April 1, 1996
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Exchange Reserve Fund November 28,
1995
Fundamental Value Fund Inc. February 1,
1996
Global Government Bond Portfolio February 28,
1996
Government Portfolio February 16,
1996
Government Securities Fund April 29,
1996
Growth and Income Fund April 22,
1996
Growth Opportunity Fund April 29,
1996
Growth Portfolio February
5,
1996
High Growth Portfolio February
5,
1996
High Income Fund November
28,
1995
Income Portfolio February
5,
1996
International Balanced Portfolio February
28,
1996
International Equity Portfolio February
28,
1996
Investment Grade Bond Fund April 29,
1996
Managed Governments Fund Inc. November
29,
1995
Managed Growth Fund April 29,
1996
Natural Resources Fund Inc. January 5,
1996
Pacific Portfolio February
28,
1996
Premium Total Return Fund November
28,
1996
Short-Term U.S. Treasury Securities Portfolio April 1, 1996
Special Equities Fund April 29,
1996
Strategic Investors Fund April 22,
1996
U.S. Government Securities Portfolio April 1,
1996
Utilities Fund November
28,
1995
</TABLE>
FD0 1145 6/96
SMITH BARNEY INVESTMENT FUNDS PART C
Part C: OTHER INFORMATION
Item 15. Indemnification*
The response to this item is incorporated by reference
to
"Liability of
Directors" under the caption "Comparative Information On
Shareholders'
Rights" in Part A of this Registration Statement.
Item 16. Exhibits
(1) Articles of Incorporation and all amendments*
(2) Bylaws*
(3) Not Applicable
(4) Agreement and Plan of Reorganization (filed
herewith)
(5) Not Applicable
(6) Management Agreements*
(7) Distribution Agreement*
(8) Not applicable
(9) Custodian Agreement*
(10) Rule 12b-1 Plan*
(11)(a) Opinion and consent of Willkie Farr &
Gallagher**
(11)(b) Opinion of Venable, Baetjer and Howard,
LLP**
(12) Opinion and consent of Willkie Farr & Gallagher
with respect
to tax
matters**
(13) Not Applicable
(14) Consent of KPMG Peat Marwick**
(15) Not Applicable
(16) Not Applicable
(17) Form of Proxy Card (**)
* Incorporated herein by reference to Registration Statement
of Smith
Barney Investment
Funds Inc. on Form N-1A, file numbers 2-74288 and 811-3275.
** Filed herewith
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any
public
reoffering of the
securities registered through the use of a prospectus which is a
part of this
Registration Statement by any person or party who is deemed to be
an
underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933,
the reoffering prospectus will contain the information called for
by the
applicable registration form for reofferings by persons who may be
deemed
underwriters, in addition to the information called for by the
other items of
the
applicable form.
(2) The undersigned Registrant agrees that every propectus
that is
filed under
paragraph (1) above will be filed as apart of an amendment to the
Registration
Statement and will not be used until the amendment is effective,
and that, in
determining any liability under the Securities Act of 1933, each
post-
effective
amendment shall be deemed to be a new registration statement for
the
securities
offered therein, and the offering of the securities at that time
shall be
deemed to
be the initial bona fide offering of them.
SIGNATURES
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 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 6th day of August,
1996.
SMITH BARNEY INVESTMENT FUNDS INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive Officer
KNOW ALL MEN BY THESE PRRESENTS, that each person whose
signature
appears below
constitutes and appoints Heath B. McLendon, Jessica M. Bibliowicz,
Christina
T. Sydor and Robert A.
Vegliante and each and any one of them, his true and lawfuf
attorneys-in-fact
and agents, with full power
of substitution and resubstitution, for him and in his name, place
and stead,
in any and all caapacities, to
sign any or all amendments (including post-effective amendments)
to his
Registration Statement, and to file
the same, with all exhibits thereto, and other documents in
connection
therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each
of them, full power and
authority to do and perform each and every act and thin requisite
and
necessary to be done about the
premises, as fully to all intents and purposes as he might or
could do in
person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or
their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
As required by the Securities Act of 1933, this Registration has
been signed
by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board
08/6/96
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President
08/6/96
Lewis E. Daidone and Treasurer
/s/ Paul R. Ades Director 08/6/96
Paul R. Ades
/s/ Herbert Barg Director 08/6/96
Herbert Barg
/s/ Alger B. Chapman Director 08/6/96
Alger B. Chapman
/s/ Dwight B. Crane Director 08/6/96
Dwight B. Crane
/s/ Frank Hubbard Director 08/6/96
Frank Hubbard
/s/ Ken Miller Director 08/6/96
Ken Miller
/s/ John F. White Director 08/6/96
John F. White
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
(4) Agreement and Plan of Reorganization
*
(included as Exhibit A to Registrant's
Prospectus/
Proxy Statement contained in Part A of this
Registration
Statement).
(11)(a) Opinion and Consent of Willkie Farr &
Gallagher
*
with respect to validity of shares.
(11)(b) Opinion of Venable, Baetjer and Howard,
LLP
*
(12) Opinion and Consent of Willkie Farr & Gallagher
*
with respect to tax matters.
(14) Consent of KPMG Peat Marwick LLP
*
(17) Form of Proxy Card.
*
____________________
* Filed herewith.
g:\funds\sbtt\agr\misc\n14
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
<C>
Smith
Barney
Smith Barney Pro Forma Pro Forma
Special Equiti
Telecomm GrowtAdjustment Combined
(Historical)
(Historical)
ASSETS:
Investments, at cost $214,266,567
$211,213,859 - $425,480,426
Investments, at value $344,191,875
$225,652,384 - $569,844,259
Cash
1,067
- - ($1,067)(d) -
Dividends and interest receivable 16,479
281,533
- 98,012
Receivable for Fund shares sold 5,004,240
180,055
- 184,295
Receivable for Securities sold 308,750
6,486,528
- 6,795,278
Total Assets 349,522,411
232,600,500
(1,067) 582,121,844
LIABILITIES:
Payable for securities purchased 2,871,875
4,510,777
- 7,382,652
Payable for Fund shares redeemed 614,072
315,622
- 929,694
Investment advisory fees payable 151,195
107,406
- 258,601
Distribution fees payable
107,420
149,504 - 256,924
Administration fees payable 54,980
39,057 - 94,037
Payable to bank -
146,970
($1,067)(d) 145,903
Accrued expenses and other liabilities 544,664
95,645
(190,100)(c) 450,209
Total Liabilities 4,344,206
5,364,981 (191,167) 9,518,020
Net Assets $345,178,205
$227,235,519 $190,100 $572,603,824
NET ASSETS:
Par value of capital shares $11,476
$18,074
($10,492)(a) $19,058
Capital paid in excess of par value 209,932,095
204,184,916
200,592(a)(c) 414,317,603
Accumulated net realized gain on security transac 5,309,326
8,594,004
- 13,903,330
Net unrealized appreciation of investments 129,925,308
14,438,525
- 144,363,833
Net Assets $345,178,205
$227,235,519 $190,100 $572,603,824
Outstanding Shares:
CLASS A 5,234,499
5,590,074 (3,255,979)(a) 7,568,594
CLASS B 5,748,436
12,409,796 (7,193,178)(a) 10,965,054
CLASS C 316,409
75,121 (43,049)(a) 348,481
CLASS Z 176,117
- - - 176,117
Net Asset Value
CLASS A(and redemption price)$30.44 $12.71
$30.45 (e)
CLASS B $29.76
$12.51
$29.77 (e)
CLASS C $29.77
$12.71 $29.78 (e)
CLASS Z $30.46
- $30.47 (e)
MAXIMUM OFFERING PRICE $32.04 $13.38
$32.05
</TABLE>
See accompanying notes to pro forma financial statements.
PRO FORMA STATEMENT OF OPERATIONS AT DECEMBER 31, 1995 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Smith
Barney Smith
Barney Pro Forma Pro Forma
Special
Equities
Telecomm GrowtAdjustment Combined
(Historical)
(Historical)
INVESTMENT INCOME:
Interest
$810,146$551,582
- $1,361,728
Dividends
165,805
2,280,672 - 2,446,477
Less: Foreign withholding tax -
(190,719)
- (190,719)
Total Investment Income 975,951
2,641,535
- 3,808,205
EXPENSES:
Investment advisory fee 1,276,355
1,393,007
- 2,669,362
Administration fee
464,129
506,548 - 970,677
Distribution fees 1,457,522
1,941,865
- 3,399,387
Shareholder and system servic 449,230
431,493
(15,000)(b) 865,723
Shareholder communications fee 72,000
50,000
(25,000)(b) 97,000
Registration fees
90,000
90,000 (90,000)(b) 90,000
Legal and auditing fees
50,400
39,100 (39,100)(b) 50,400
Directors' fees
50,000
18,000 (18,000)(b) 50,000
Custody
40,000
41,096 - 81,096
Other
221,944
23,915 (3,000)(b) 242,859
Total Expenses
4,171,580 4,535,024
(190,100) 8,516,504
NET INVESTMENT LOSS (3,195,629)
(1,893,489)
190,100 (c) (4,899,018)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES
Realized Gain From:
Security transactions 21,960,199
21,752,822
- 43,713,021
Foreign currency transactions -
633 - 633
Net Realized Gain 21,960,199
21,753,455 - 43,713,654
Change in Unrealized Appreciation of
Investments
Beginning of Year 31,895,265
15,076,522
- 46,971,787
End of Year 129,925,308
14,438,525
- 144,363,833
Change in Net Unrealized App. 98,030,043 (637,997)
-
97,392,046
Net Gain On Investments 119,990,242 21,115,458
- 141,105,700
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$116,794,613 $19,221,969
$190,100
$136,206,682
</TABLE>
See accompanying notes to pro forma financial statements.
(a) reflects new shares issued by Special Equities.
(b) decrease due to duplicative services.
(c) decrease in expenses reflected in
paid in
excpar value
as the fund reclasses net
investment
losthis account.
(d) reclass to net cash with bank overdraft.
(e) the pro forma combined net asset values
are reflective
of the
pro forma adjustments
referred to in
footnotes (a) - (d) above.
PRO FORMA SCHEDULE OF INVESTMENTS (unaudited)(continued)
December 31, 1995
SPECIAL TELECOM
EQUITY GROWTH
SPECIAL TELECOM
SHARES/ SHARES/
EQUITY GROWTH COMBINED
FACE AMOUNT FACE AMOUNT SECURITY VALUE
VALUE VALUE
COMMON STOCKS - 92.6%
Advertising - 0.4%
65,000 CKS Group Inc.+
$2,535,000 $2,535,000
Brewers - 0.6%
80,000 Boston Beer Co.
Inc.+
1,900,000 1,900,000
50,000 Red Hook Ale
Brewery Inc.+
1,300,000 1,300,000
3,200,000 3,200,000
Business Services - 0.3%
50,000 Corestaff Inc.+
1,825,000 1,825,000
Capital Goods - 2.0%
285,000 General
Instruments Corp.+
$ 6,661,875 6,661,875
328,000 Scientific-
Atlanta, Inc.
4,920,000 4,920,000
11,581,875 11,581,875
Communications - 20.1%
220,000 Adtran Inc.+
11,948,750 11,948,750
184,000 AirTouch
Communications Inc.+
5,198,000 5,198,000
150,000 America Online
Inc.+
5,625,000 5,625,000
100,000 Arch
Communications Group
Inc.+2,400,000 2,400,000
300,000 Ascend
Communications Inc.+
24,337,152 24,337,152
200,000 Aspect
Telecommunications
Corp.+ 6,700,000 6,700,000
101,333 Cellular Communications of
Puerto Rico,
Inc.+ 2,811,992 2,811,992
117,500 Cellular Communications Inc.,
Class A
Shares+ 5,845,625 5,845,625
130,000 DSC Communications Corp.+
4,793,750 4,793,750
470,000 Ericsson LM Telephone Co.,
Class B Shares,
ADR 9,165,000 9,165,000
92,000 Grupo Televisa, SA ADR
2,070,000 2,070,000
171,200 MFS Communications Co., Inc.+
9,116,400 9,116,400
114,000 Motorola Inc.
6,498,000 6,498,000
206,000 NEXTEL Communications Inc.,
Class A
Shares+ 3,038,500 3,038,500
107,000 Nokia Corp. ADR
4,159,625 4,159,625
81,500 Rogers Cantel Mobile
Communications,
Inc., Clas 2,159,750 2,159,750
150,000 Tellabs Inc.+
5,550,000 5,550,000
63,500 Vanguard Cellular Systems
Inc., Class A
Shares+ 3,310,875 3,310,875
51,010,902 63,717,517 114,728,419
Consumer Services - 5.3%
200,000 Bell Cablemedia
PLC, ADR+
3,200,000 3,200,000
45,000 CMG Information
Services Inc.+
4,179,375 4,179,375
Consumer Services - 5.3% (continued)
218,700 Comcast Corp.,
Class A Shares
$3,854,587 $3,854,587
109,350 Comcast Corp.,
Class A Shares
Special 1,988,803 1,988,803
100,000 Comcast UK Cable
Partners
Ltd.+ 1,250,000 1,250,000
16,800 Grupo Iusacell, SA
ADR, Series
D+ 134,400 134,400
134,200 Grupo Iusacell, SA
ADR, Series
L+ 1,358,775 1,358,775
50,000 NYNEX Cable
Communications
Group A+ 868,750 868,750
28,000 Peoples Choice TV
Corp.+
532,000 532,000
83,350 Tele-Communications Liberty-Media,
Class A Shar
2,240,031 2,240,031
283,400 Tele-
Communications Inc.,
Class A Shares+ 5,632,575 5,632,575
134,500 Time Warner, Inc.
5,094,187 5,094,187
30,333,483 30,333,483
Energy - 3.0%
530,000 Global Marine
Inc.+
4,637,500 4,637,500
337,000 Rowan Companies,
Inc.+
3,327,875 3,327,875
64,200 Schlumberger, Ltd.
4,445,850 4,445,850
142,000 Varco
International, Inc.+
1,704,000 1,704,000
105,000 Weatherford
International,
Inc.+ 3,031,875 3,031,875
17,147,100 17,147,100
Entertainment & Leisure - 2.4%
600,000 Callaway Golf Co.
13,575,000 13,575,000
Healthcare - 5.0%
35,000 HCIA Inc.+
1,636,250 1,636,250
45,000
Henry Schein Inc.+
1,327,500 1,327,500
50,000
IDX Systems Corp.+
1,737,500 1,737,500
80,000
Occusystems Inc.+
1,600,000 1,600,000
150,000
Phycor Inc.+
7,584,375 7,584,375
60,000 Physicians Sales
& Service
Inc.+ 1,710,000 1,710,000
100,000
Steris Corp.+
3,225,000 3,225,000
220,000 Target
Therapeutics Inc.+
9,405,000 9,405,000
28,225,625 28,225,625
Office Products - 4.0%
200,000 Corporate Express
Inc.+
6,025,000 6,025,000
200,000 Micro Warehouse
Inc.+
8,650,000 8,650,000
Office Products - 4.0% (continued)
150,000
Officemax Inc.+
$3,356,250 $3,356,250
100,000 Viking Office
Products Inc.+
4,650,000 4,650,000
22,681,250 22,681,250
Pharmaceuticals - 0.7%
85,000 Biochem Pharma
Inc.+
3,410,625 3,410,625
25,000
Centocor Inc.+
771,875 771,875
4,182,500 4,182,500
Restaurant - 5.6%
420,000 Boston Chicken
Inc.+
13,492,500 13,492,500
164,000 Manhattan Bagel
Co.+
2,952,000 2,952,000
740,000 Starbucks Corp.+
15,540,000 15,540,000
31,984,500 31,984,500
Retail - 10.4%
300,000 Baby Superstore
Inc.+
17,100,000 17,100,000
60,000 De Rigo S.p.A
ADR+
1,365,000 1,365,000
100,000 Global DirectMail
Corp.+
2,750,000 2,750,000
285,000 The Mens Wearhouse
Inc.+
7,338,750 7,338,750
60,000 MSC Industrial
Direct Co.+
1,635,000 1,635,000
130,000
Oakley Inc.+
4,420,000 4,420,000
405,000
PETsMART Inc.+
2,555,000 12,555,000
500,000 Sunglass Hut
International
Inc.+ 11,875,000 11,875,000
59,038,750 59,038,750
Semiconductor and Electronics- 4.6%
185,000 C-Cube
Microsystems Inc.+
11,562,500 11,562,500
170,000 Discreet Logic
Inc.+
4,250,000 4,250,000
105,000 Gemstar
International Group
Ltd.+ 2,979,375 2,979,375
175,000
LSI Logic Corp.+
5,731,250 5,731,250
90,000
Zoran Corp.+
1,867,500 1,867,500
26,390,625 26,390,625
Software - 7.3%
100,000
Baan Co. NV+
4,525,000 4,525,000
100,000 Datalogix
International Inc.+
1,262,500 1,262,500
50,000 Davidson &
Associates Inc.+
1100000 1,100,000
375,000
Macromedia Inc.+
19,593,750 19,593,750
Software - 7.3% (continued)
100,000
Maxis Inc.+
$3,800,000 $3,800,000
265,000
Peoplesoft Inc.+
11,395,000 11,395,000
41,676,250 41,676,250
Technology - 10.6%
130,000 Alpha Industries
Inc.+
$1,836,250 1,836,250
128,000
Anadigics, Inc.+
2,720,000 2,720,000
100,000 Analog Devices
Inc.+
3,537,500 3,537,500
120,000
Avant Corp.+
2,310,000 2,310,000
67,000 FTP Software Inc.+
1,943,000 1,943,000
70,000
Harbinger Corp.+
1,610,000 1,610,000
53,000 Hewlett-Packard
Co.
4,438,750 4,438,750
67,000 Inso Corp.+
2,847,500 2,847,500
60,000 McAfee Associates
Inc.+
2,632,500 2,632,500
80,000
Metatools Inc.+
2,080,000 2,080,000
65,000 Newbridge Networks
Corp.+
2,689,375 2,689,375
30,000 Objective Systems
Integrators
Inc 1,642,500 1,642,500
75,000 Premenos
Technology Corp.+
1,978,125 1,978,125
130,000
Shiva Corp.+
9,457,500 9,457,500
185,000 Softkey
International Inc.+
4,278,125 4,278,125
135,000
Symantec Corp.+
3,138,750 3,138,750
111,300
3Com Corp.+
5,189,363 5,189,363
120,000 Triquint
Semiconductors Inc.+
1,620,000 1,620,000
100,000
Verity Inc.+
4,425,000 4,425,000
23,503,125 36,871,113 60,374,238
Telecommunications - 10.2%
114,000 C-TEC Corp., Class
B Shares
3,477,000 3,477,000
302,700 MCI Communications
Corp.
7,908,038 7,908,038
100,000 Nera AS ADR+
3,250,000 3,250,000
100,000
Panamsat Corp.+
2,206,250 2,206,250
70,000 Perusahaan
Perseroan
Indonesian Satellite ADR 2,555,000 2,555,000
158,550 Sprint Corp.
6,322,181 6,322,181
100,000 Tele Danmark A/S,
Class B
Shares ADR 2,762,500 2,762,500
41,500 Telecom
Corporation Argentina
Stet-France ADR 1,976,438 1,976,438
52,900 Telecom
Corporation New
Zealand Ltd. ADR 3,669,937 3,669,937
Telecommunications - 10.2% (continued)
40,000 TelecomAsia
Corporation Pub.
Ltd.+** $1,205,000 $1,205,000
81,000 Telecommunication
Brasileiras
ADR+ 3,837,375 3,837,375
73,000 Telefonica de
Argentina, SA
ADR, Class B Shares1,989,250 1,989,250
62,000 Telefonica de
Espana, SA ADR
2,596,250 2,596,250
110,200 Telefonos de
Mexico, SA ADR
3,512,625 3,512,625
476,000 Telekom Malaysia
3,712,012 3,712,012
270,000 Thai Telephone &
Comm Public
Co. Ltd.+ 1,468,440 1,468,440
152,000 Vodaphone Group
PLC ADR
5,358,000 5,358,000
57,806,296 57,806,296
Transportation - 0.1%
20,000 Eagle USA
Airfreight Inc.+
$525,000 525,000
TOTAL COMMON
STOCKS
(Cost -
$383,561,426)
310,353,527 217,457,384 527,810,911
PREFERRED STOCKS - 0.5%
Telecommunications - 0.5%
57,000 Phillipine Long
Distance
Telephone Co. Series III $3.50
(Cost -
$2,850,000)
2,964,000 2,964,000
Warrants
696 Jan Bell Marketing
Inc.,
Expires 348 348
REPURCHASE AGGREEMENTS - 6.9%
$33,762,000 Morgan Stanley,
5.844% due
1/2/96; Proceeds at maturity -
$33,783,924;
(Fully
Collateralized by U.S. Treasury Notes,
5.125% due
4/30/98: Market
value 33,762,000 33,762,000
76,000 Goldman Sachs,
5.649% due
1/2/96; Proceeds at maturity -
$76,048; (Fully
Collateralized
by U.S. Treasury Notes,
5.375% due
11/30/97; Market
value 76,000 76,000
REPURCHASE AGGREEMENTS - 6.9% (continued)
$5,231,000 Chemical
Securities Inc. ,
5.800% due 1/2/96
Proceeds at
maturity -
$5,234,370; (Fully collateralized
by U.S. Treasury
Notes, 6.125%
due 5/31/97;
Market value -
$5,335,758)
(Cost - $5,231,000) $5,231,000 $5,231,000
TOTAL REPURCHASE
AGGREEMENTS
(Cost -
$39,069,000)
33,838,000 5,231,000 39,069,000
TOTAL INVESTMENTS
- - 100%
(Cost - $425,480,426*)
$344,191,875 $225,652,384 $569,844,259
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes
is
substantially the same.
** Security exempt from registration under Rule
144a of
Securities Act of 1933. These securities may
be
resold in transactions exempt from
registration,
generally to qualified institutional buyers.
See accompanying
notes to pro
forma financial statements.
EXHIBIT 11(a) OPINION OF WILLKIE FARR & GALLAGHER WITH
RESPECT TO VALIDITY OF SHARES
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
August 2, 1996
Smith Barney Investment Funds Inc.
on behalf of the Special Equities Fund
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel to Smith Barney Investment Funds Inc., a
Maryland corporation (the
"Company"), in connection with the proposed acquisition by the
Company, on behalf of the Special
Equities Fund (the "Acquiring Fund"), a portfolio of the Company,
of all or substantially all of the assets
and certain scheduled liabilities of the Telecommunications Growth
Fund (the "Acquired Fund"), a
portfolio of Smith Barney Telecommunications Trust, a
Massachusetts business trust (the "Trust"), in
exchange for Class A, Class B and Class C shares of the Acquiring
Fund (collectively, the "Shares"),
pursuant to an Agreement and Plan of Reorganization to be executed
by the Company, on behalf of the
Acquiring Fund, and by the Trust, on behalf of the Acquired Fund
(the "Agreement").
We have examined the Company's Registration Statement on Form N-14
substantially in the form in
which it is to become effective (the "Registration Statement"),
the Company's Charter and By-Laws, and
a draft of the Agreement substantially in the form in which it is
to be attached to the Prospectus/Proxy
Statement included in the Registration Statement.
We have also examined and relied upon such corporate records of
the Company and other documents
and certificates with respect to factual matters as we have deemed
necessary to render the opinion
expressed herein. We have assumed, without independent
verification, the genuineness of all
signatures, the authenticity of all documents submitted to us as
originals and the conformity with
originals of all documents submitted to us as copies. We have
further assumed that the Agreement will
be duly executed and delivered in substantially the same form as
the draft submitted to us and that upon
such execution and delivery, it will constitute the legal, valid
and binding obligation of the Trust,
enforceable against the Trust in accordance with its terms, and,
further, that the number of Shares to be
issued by the Company to the Trust on behalf of the Acquired Fund
and then distributed to shareholders
of the Acquired Fund pursuant to the Agreement will not exceed the
respective number of then unissued
Shares of each class of the Acquiring Fund authorized in the
Company's Charter. As to matters of
Maryland law, we have relied solely on the opinion of Venable,
Baetjer and Howard, LLP with respect
to the matters addressed therein, which is satisfactory to us in
form and scope, a copy of which is
annexed hereto.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation validly existing and in good
standing under the laws
of the State of Maryland.
2. When the Board of Directors of the Company has taken the
action described in
Section 2-203 of the Maryland General Corporation Law with respect
to the issuance of the Shares, the
Shares of the Acquiring Fund to be issued as contemplated in the
Agreement will have been, to the
extent of the number of Shares of the respective class authorized
in the Charter of the Company and
then unissued, duly authorized, and, subject to the receipt by the
Company of consideration equal to the
net asset value thereof (but in no event less than the par value
thereof), when thereafter issued in
accordance with the Agreement, will be validly issued, fully paid
and nonassessable Shares of the
Acquiring Fund under the laws of the State of Maryland.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement, to the
references to us in the Prospectus/Proxy Statement included as
part of the Registration Statement and to
the filing of this opinion as an exhibit to any application made
by or on behalf of the Company or any
distributor or dealer in connection with the registration or
qualification of the Company or the Shares
under the securities laws of any state or other jurisdiction.
This opinion is furnished by us as counsel to the Company, is
solely for the benefit of the Company and
its governing board in connection with the above described
transfer of assets and may not be relied upon
for any other purpose or by any other person.
Very truly yours,
/s/Willkie Farr & Gallagher
Page 2
0144807.02
EXHIBIT 11(b) : OPINION AND CONSENT OF VENABLE, BAETJER
HOWARD, LLP
[LETTERHEAD OF VENABLE, BAETJER HOWARD, LLP]
August 2, 1996
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022-4669
Re: Smith Barney Investment Funds Inc. (Special Equities Fund)
Ladies and Gentlemen:
We have acted as special Maryland counsel to Smith Barney
Investment
Funds Inc., a Maryland corporation (the "Company"), in connection
with the proposed
acquisition by the Company, on behalf of its Special Equities Fund
portfolio (the
"Acquiring Fund"), of all or substantially all the assets and
certain scheduled liabilities of
Telecommunications Growth Fund (the "Acquired Fund"), a portfolio
of Smith Barney
Telecommunications Trust, a Massachusetts business trust (the
"Trust"), in exchange for
Class A, Class B, and Class C shares of the Acquiring Fund
(collectively, the "Shares"),
pursuant to an Agreement and Plan of Reorganization to be executed
by the Company, on
behalf of the Acquiring Fund, and by the Trust, on behalf of the
Acquired Fund (the
"Agreement").
We have examined the Company's Registration Statement on Form N-14
substantially in the form in which it is to become effective (the
"Registration Statement"),
the Company's Charter and Bylaws, and a draft of the Agreement
substantially in the form
in which it is to be attached to the Prospectus/Proxy Statement
included in the
Registration Statement. We have further examined and relied upon
a certificate of the
Maryland State Department of Assessments and Taxation to the
effect that the Company
is duly incorporated and existing under the laws of the State of
Maryland and is in good
standing and duly authorized to transact business in the State of
Maryland.
We have also examined and relied upon such corporate records of
the
Company and other documents and certificates with respect to
factual matters as we have
deemed necessary to render the opinion expressed herein. We have
assumed, without
independent verification, the genuineness of all signatures, the
authenticity of all
documents submitted to us as originals, and the conformity with
originals of all documents
submitted to us as copies. We have further assumed that the
Agreement will be duly
executed and delivered in substantially the same form as the draft
submitted to us and that
upon such execution and delivery, it will constitute the legal,
valid and binding obligation
of the Trust, enforceable against the Trust in accordance with its
terms, and, further, that
the number of Shares of each class of the Acquiring Fund to be
issued by the Company to
the Trust on behalf of the Acquired Fund and then distributed to
the shareholders of the
Acquired Fund pursuant to the Agreement will not exceed the
respective number of then
unissued Shares of each class of the Acquiring Fund authorized in
the Company's Charter.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation validly existing and in good
standing
under the laws of the State of Maryland.
2. When the Board of Directors of the Company has taken the
action
described in Section 2-203 of the Maryland General Corporation Law
with respect to the
issuance of the Shares, the Shares of the Acquiring Fund to be
issued as contemplated in
the Agreement will have been, to the extent of the number of
Shares of the respective
class authorized in the Charter of the Company and then unissued,
duly authorized, and,
subject to the receipt by the Company of consideration equal to
the net asset value thereof
(but in no event less than the par value thereof), when thereafter
issued in accordance with
the Agreement will be validly issued, fully paid and nonassessable
Shares of the Acquiring
Fund under the laws of the State of Maryland.
This letter expresses our opinion with respect to the Maryland
General
Corporation Law governing matters such as the authorization and
issuance of stock. It
does not extend to the securities or "blue sky" laws of Maryland,
to federal securities
laws or to other laws.
You may rely on our foregoing opinion in rendering your opinion to
the
Company that is to be filed as an exhibit to the Registration
Statement. We consent to the
filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ VENABLE, BAETJER AND HOWARD, LLP
BA3DOCS1\0041193.02
EXHIBIT 12: OPINION AND CONSENT OF WILLKIE
FARR AND GALLAGHER WITH RESPECT OT TAX MATTERS
[LETTER HEAD OF WILLKIE FARR & GALLAGHER]
August 2, 1996
Smith Barney Investment Funds Inc.
on behalf of the Special Equities Fund
388 Greenwich Street
New York, New York 10013
Smith Barney Telecommunications Trust
on behalf of Telecommunications Growth Fund
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
You have asked us for our opinion concerning certain
federal income tax consequences to (a) Telecommunications
Growth Fund (the "Acquired Fund"), a separate investment
portfolio of Smith Barney Telecommunications Trust, a
Massachusetts business trust, (b) the Special Equities
Fund (the "Acquiring Fund"), a separate investment
portfolio of Smith Barney Investment Funds Inc., a
Maryland corporation (the "Company"), and (c) holders of
shares of beneficial interest in the Acquired Fund (the
"Acquired Fund Shareholders") when the holders of Class
A, Class B and Class C shares of the Acquired Fund
receive Class A shares, Class B shares and Class C
shares, respectively (all such shares of the Acquiring
Fund referred to hereinafter as the "Acquiring Fund
Shares"), in liquidation of their interests in the
Acquired Fund pursuant to an acquisition by the Company,
on behalf of the Acquiring Fund, of all or substantially
all of the assets of the Acquired Fund in exchange for
the Acquiring Fund Shares and the assumption by the
Company, on behalf of the Acquiring Fund, of certain
scheduled liabilities of the Acquired Fund and the
subsequent liquidation of the Acquired Fund and
distribution in liquidation of the Acquiring Fund Shares
to the Acquired Fund Shareholders (the "Reorganization"),
all pursuant to an agreement and plan of reorganization.
We have reviewed such documents and materials as we have
considered necessary for the purpose of rendering this
opinion. In rendering this opinion, we assume that such
documents as yet unexecuted will, when executed, conform
in all material respects to the proposed forms of such
documents that we have examined. In addition, we assume
the genuineness of all signatures, the capacity of
eachparty executing a document so to execute that
document, the authenticity of all documents submitted to
us as originals and the conformity to original documents
of all documents submitted to us as certified or
photostatic copies.
We have made inquiry as to the underlying facts which we
considered to be relevant to the conclusions set forth in
this letter. The opinions expressed in this letter are
based upon certain factual statements relating to the
Acquired Fund and the Acquiring Fund set forth in the
Registration Statement on Form N-14 (the "Registration
Statement") filed by the Company on behalf of the
Acquiring Fund with the Securities and Exchange
Commission and representations to be made in letters from
the Acquired Fund and the Acquiring Fund addressed to us
for our use in rendering a final opinion. Based on
information received from the Acquired Fund and the
Acquiring Fund, we have no reason to believe that we will
not be able to render this opinion as a final opinion at
the Closing. We have no reason to believe that these
representations and facts will not be valid, but we have
not attempted and will not attempt to verify
independently any of these representations and facts, and
this opinion is based upon the assumption that each of
them is accurate. Capitalized terms used herein and not
otherwise defined shall have the meaning given them in
the Registration Statement.
The conclusions expressed herein are based upon the
Internal Revenue Code of 1986 (the "Code"), Treasury
regulations issued thereunder, published rulings and
procedures of the Internal Revenue Service and judicial
decisions, all as in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) the transfer of all or substantially all of the
Acquired Fund's assets in exchange for Acquiring Fund
Shares and the assumption by the Company on behalf of the
Acquiring Fund of certain scheduled liabilities of the
Acquired Fund will constitute a "reorganization" within
the meaning of Section 368(a)(1)(C) of the Code, and the
Acquired Fund and the Acquiring Fund are each a "party to
a reorganization" within the meaning of Section 368(b) of
the Code;
(2) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the
Acquired Fund in exchange for Acquiring Fund Shares and
the assumption by the Company on behalf of the Acquiring
Fund of certain scheduled liabilities of the Acquired
Fund;
(3) no gain or loss will be recognized by the
Acquired Fund upon the transfer of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the
assumption by the Company on behalf of the Acquiring Fund
of certain scheduled liabilities of the Acquired Fund or
upon the distribution (whether actual or constructive) of
Acquiring Fund Shares to Acquired Fund Shareholders;
(4) no gain or loss will be recognized by the
Acquired Fund Shareholders upon the exchange of their
shares of the Acquired Fund for Acquiring Fund Shares;
(5) the aggregate tax basis of Acquiring Fund
Shares received by each Acquired Fund Shareholder
pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares of the Acquired Fund
surrendered therefor, and the holding period of the
Acquiring Fund Shares to be received by each Acquired
Fund Shareholder will include the period during which the
shares of the Acquired Fund exchanged therefor were held
by such Acquired Fund Shareholder (provided the shares of
the Acquired Fund were held as capital assets on the date
of the Reorganization); and
(6) the tax basis to the Acquiring Fund of the
Acquired Fund's assets acquired in the Reorganization
will be the same as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization,
and the holding period of the assets of the Acquired Fund
acquired in the Reorganization will include the period
during which those assets were held by the Acquired Fund.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the use of
our name and any reference to our firm in the
Registration Statement or in the Prospectus/Proxy
Statement constituting a part thereof.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
EXHIBIT 14: CONSENT OF KPMG PEAT MARWICK LLP
[LETTERHEAD OF KPMG PEAT MARWICK LLP
Independent Auditors' Consent
To the Trustees and Shareholders of the
Smith Barney Investment Funds Inc.:
We consent to the use of our reports dated February 16, 1996 and February 22,
1996
with respect to the Smith Barney Special Equities Fund and the Smith Barney
Telecommunications Growth Fund, respectively, incorporated herein by reference
in the
Prospectus/Proxy Statement and included in this Registration Statement on Form
N-14 for
the Smith Barney Investment Funds Inc. and to the references to our firm under
the
headings "Financial Statements and Experts" in the Prospectus/Proxy Statement
and
"Counsel and Auditors" in the Statement of Additional Information incorporated
herein
by reference.
/s/ KPMG PEAT MARWICK LLP
August 2, 1996
New York, New York
EXHIBIT 17: FORM OF PROXY CARD
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please detach at perforation before mailing)
..............................................................................
..............................................
........................................................................
..................................................
SMITH BARNEY TELECOMMUNICATIONS GROWTH FUND
PROXY SOLICITED BY THE BOARD OF TRUSTEES
The undersigned holder of shares of Smith Barney Telecommunications Growth
Fund , hereby
apppoints
Heath B. McLendon, Jessica M. Bibliowicz, Christina T. Sydor and Robert A.
Vegliante attorneys
and
proxies for the undersigned with full powers of substitution and revocation,
to represent the
undersigned
and to vote on behalf of the undersigned all shares of the Telecommunications
Growth Fund that
the
undersigned is entitled to vote at the Special Meeting of Shareholders of the
Telecommunications
Growth
Fund to be held at the offices of the Telecommunications Growth Fund, 388
Greenwich Street,
26th Floor,
New York, New York on September 19, 1996 at ____ .m., and any adjournment or
adjournments
thereof.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and
Prospectus/Proxy
Statement dated August , 1996 and hereby instructs said attorneys and
proxies to vote said
shares as
indicated herein. In their discretion, the proxies are authorized to vote
upon such other business as
may
properly come before the Special Meeting. A majority of the proxies present
and acting at the
Special
Meeting in person or by substitute (or, if only one shall be so present, then
that one) shall have and
may
exercise all of the power and authority of said proxies hereunder. The
undersigned hereby revokes
any
proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears on this Proxy. If joint
owners, EITHER may
sign this
Proxy. When signing as attorney, executor, administrator, trustee, guardian
or corporate officer,
please
give your full title.
Date: ______________________________________________
______________________________________________
Signature(s) Title(s), if applicable)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RRESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
......................................
..............................................................................
......................................
Please indicate your vote by an "X" in the appropriate box below. This proxy,
if properly
executed, will be
voted in the manner directed by the undersigned shareholder. IF NO DIRECTION
IS MADE,
THIS
PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSAL.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
To approve or dissapprove the Agreement and Plan of Reorganization dated as of
July 29, 1996
providing
for (i) the acquisition of all or substantially all of the assets of Smith
Barney Telecommunications
Growth
Fund (the "Acquired Fund") in exchange for shares of Smith Barney Special
Equities Fund (the
"Acquiring
Fund") and the assumption by Smith Barney Investment Funds, on behalf of the
Acquiring Fund of
certain
scheduled liabilities of the Acquired Fund, (ii) the distribution to
shareholders of the Acquired
Fund of such
shares of the Acquiring Fund in liquidation of the Acquired Fund and (iii) the
subsequent
termination of the
Acquired Fund.
