As filed with the Securities and Exchange Commission on April 29, 1996
- -----------------------------------------------------------------------------
Registration No. 2-74288
811-3275
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [X] Post-Effective Amendment No.43
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940, as amended
Amendment No. 45 [ X ]
SMITH BARNEY INVESTMENT FUNDS INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 723-9218
Christina T. Sydor
Secretary
SMITH BARNEY INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
pproximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
________on [ ], 1996 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
________on _________ pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice for the
fiscal year ended December 31, 1995 was filed on February 29, 1996 as accession
number 0000355747-96-000002.
To Register Additional Securities under Reg. 270.24e-2
CALCULATION OF REGISTRATION FEE
Title of Share Proposed Proposed
securities Amount Maximum Maximum Amount of
being being offering aggregate registration
registered registered price per offering* fee
share
Government Securities 8,968,417 $9.31 $290,000 $100
The fee for the shares to be registered by this filing has been computed on
the basis of the market value per share in effect on April 23, 1996.
*Calculation of the proposed maximum offering price has been made pursuant
to Rule 24e-2.
During its fiscal year ended December 31, 1995, the Government Securities Fund
redeemed 14,672,026 shares.
During its current fiscal year, the fund used 5,734,758 shares it redeemed
during its fiscal year ended December 31, 1995, for a reduction pursuant to
Rule 24f-2(c).
The fund currently is registering 8,968,417 shares , which is equal to the
remaining 8,937,268 shares redeemed during its fiscal year ended December 31,
1995, plus 31,149 shares.
During its current fiscal year, the fund filed no other post-effective
amendments for the purpose of reduction pursuant to Rule 24e-2(a).
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
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-1A CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a) Under the Securities Act of 1933, as amended
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Condensed Financial Highlights
Financial Highlights Information
4. General Description of Registrant Cover Page; Prospectus Summary
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor; Additional
Information; Annual Report
6. Capital Stock and Other Investment Objective and
Securities
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Valuation of Shares; Purchase of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8 Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not Applicable
Part B
Item No. and Caption
Statement of
Additional Information Caption
10. Cover Page
Cover page
11. Table of Contents
Contents
12. General Information and History
Distributor; Additional Information
13. Investment Objectives and Policies
Investment Objectives Management and Policies
14. Management of the Fund
Management of the Company;
Distributor
15. Control Persons and Principal Management of the Company
Holders of Securities
16. Investment Advisory and Other Management of the Company;
Services
Distributor
17. Brokerage Allocation and Investment Objective and
Other Services
Management Policies; Distributor
18. Capital Stock and Other
Investment Objective and Securities
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Purchase of Shares; Redemption
Pricing of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
see Prospectus "Purchase of Shares"
22. Calculations of Performance
Performance Data
23. Financial Statements
Financial Statements
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
PROSPECTUS
SMITH BARNEY
Special
Equities
Fund
Class Z Shares Only
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 -- Class Z Shares
- --------------------------------------------------------------------------------
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, diversified management investment
company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including 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.
The Class Z shares described in this Prospectus are currently offered
exclusively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans").
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 -- Class Z Shares
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
The Fund's Expenses 3
- --------------------------------------------------------------------------------
Financial Highlights 4
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 5
- --------------------------------------------------------------------------------
Valuation of Shares 8
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 9
- --------------------------------------------------------------------------------
Purchase and Redemption of Shares 10
- --------------------------------------------------------------------------------
Exchange Privilege 11
- --------------------------------------------------------------------------------
Performance 12
- --------------------------------------------------------------------------------
Management of the Fund 13
- --------------------------------------------------------------------------------
Additional Information 14
- --------------------------------------------------------------------------------
================================================================================
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 -- Class Z Shares
- --------------------------------------------------------------------------------
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 Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year.
================================================================================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.75%
Other expenses 0.35%
================================================================================
Total Fund Operating Expenses 1.10%
================================================================================
The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "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 and 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 in Class Z shares of
the Fund, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period: $11 $35 $61 $134
================================================================================
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.
3
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for the period ended December 31, 1995 has been
audited in conjunction with the annual audits of the financial statements of the
Fund by KPMG Peat Marwick LLP, independent auditors. The 1995 financial
statements and the independent auditors' report thereon appear in the December
31, 1995 Annual Report to Shareholders.
For a Class Z share of capital stock outstanding throughout the period:
1995(1)
================================================================================
Net Asset Value, Beginning of Period $26.49
- --------------------------------------------------------------------------------
Income From Operations:
Net investment loss (0.06)
Net realized and unrealized gain (loss) 4.79
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.73
- --------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.76)
- --------------------------------------------------------------------------------
Total Distributions (0.76)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $30.46
- --------------------------------------------------------------------------------
Total Return 17.95%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $5,364
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.10%+
Net investment loss (0.86)+
Portfolio Turnover Rate 113%
Average commissions paid on
equity security transactions (2) $0.06
================================================================================
(1) For the period from October 2, 1995 (inception date) to December 31, 1995.
(2) 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.
4
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
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 Smith Barney Mutual Funds Management Inc. ("SBMFM"), the Fund's
investment adviser believes to have superior appreciation potential. There can
be no assurance that the Fund will achieve its investment objective.
The Fund invests primarily in equity securities of secondary growth
companies, generally not within the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), as identified by SBMFM. These companies may not have reached
a fully mature stage of earnings growth, since they may still be in the
developmental stage, or may be older companies which appear to be entering a new
stage of more rapid earnings progress due to factors such as management change
or development of new technology, products or markets. A significant number of
these companies may be in technology areas, including health care related
sectors, and may have annual sales of less than $300 million. The Fund may also
choose to invest in some relatively unseasoned stocks, i.e., securities issued
by companies whose market capitalization is under $100 million.
Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase agreements
for temporary defensive purposes, lend its portfolio securities and enter into
short sales "against the box."
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information. These
restrictions and the Fund's investment objective are fundamental policies, which
means that they may not be changed without a majority vote of shareholders of
the Fund. Except for the objective and those restrictions specifically
identified as fundamental, all investment policies and practices described in
this Prospectus and in the Statement of Additional Information are
non-fundamental, so that the Board of Directors may change them without
shareholder approval. The fundamental restrictions applicable to the Fund
include a prohibition on (a) purchasing a security if, as a result, more than 5%
of the assets of the Fund would be invested in the securities of the issuer
(with certain exceptions) or the Fund would own more than 10% of the outstanding
5
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
voting securities of the issuer, (b) investing more than 10% of the Fund's total
assets in "illiquid" securities (which includes repurchase agreements with more
than seven days to maturity), and (c) investing more than 25% of the Fund's
total assets in the securities of issuers in a particular industry (with
exceptions for U.S. government securities and certain money market instruments).
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the U.S. government, its agencies or instrumentalities.
These include bills, certificates of indebtedness, and notes and bonds issued by
the United States Treasury or by agencies or instrumentalities of the United
States government. Some U.S. government securities, such as United States
Treasury bills and bonds, are supported by the full faith and credit of the
United States Treasury; others are supported by the right of the issuer to
borrow from the United States Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the United States government to purchase the agency's obligations; still others,
such as those of the Student Loan Marketing Association and the Federal Home
Loan Mortgage Corporation ("FHLMC"), are supported only by the credit of the
instrumentality. Mortgage participation certificates issued by the FHLMC
generally represent ownership interests in a pool of fixed-rate conventional
mortgages. Timely payment of principal and interest on these certificates is
guaranteed solely by the issuer of the certificates. Other investments will
include Government National Mortgage Association Certificates ("GNMA
Certificates"), which are mortgage-backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the United States government. While
the United States government guarantees the payment of principal and interest on
GNMA Certificates, the market value of the securities is not guaranteed and will
fluctuate.
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an 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
6
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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.
7
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that when
an occurrence subsequent to the time a foreign security is valued is likely to
have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each day. Unlisted foreign securities are
valued at the mean between the last available bid and offer price prior to the
time of valuation. Any assets or liabilities initially expressed in terms of
foreign currencies will be converted into U.S. dollar values at the mean between
the bid and offered quotations of such currencies against U.S.
8
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
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 substantially all of its net 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
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 each year 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
9
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from U.S. government securities may be exempt from all
state and local income taxes. Shareholders should consult their plan documents
and/or tax advisors for specific information on the tax consequences of
participating in a Qualified Plan.
- --------------------------------------------------------------------------------
Purchase and Redemption of Shares
- --------------------------------------------------------------------------------
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan. Purchases are effected at the net asset value next
determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the
"settlement date") after the trade date. Investors who make payment prior to the
settlement date may
10
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Purchase and Redemption of Shares (continued)
- --------------------------------------------------------------------------------
designate a temporary investment (such as a money market fund of the Smith
Barney Mutual Funds) for such payment until settlement date. The Fund reserves
the right to reject any purchase order and to suspend the offering of shares for
a period of time. There are no minimum investment requirements for Class Z
shares; however, the Fund reserves the right to vary this policy at any time.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on any day that
the Fund calculates its net asset value, are priced according to the net asset
value determined on that day. See "Valuation of Shares."
Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value as
next determined. Shareholders acquiring Class Z shares through a Qualified Plan
should consult the terms of their respective plans for redemption provisions.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Holders of Class Z shares may exchange their shares 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 shares may be made at any time
without payment of any exchange fee.
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney High Income Fund
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney Managed Growth Fund
11
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
The exchange of shares of one fund for shares of another fund is generally
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with the exchange. Shareholders should
consult their plan prospectus and/or other governing documents regarding
exchanges. Generally exchanges within such a plan are not treated as a taxable
event.
Shareholders exercising the exchange privilege with any of the other funds
of the Smith Barney Mutual Funds should review the prospectus of that fund
carefully prior to making an exchange request.
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 the shareholder. Upon such a
determination, Smith Barney will provide notice in writing or by telephone to
the shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or exchange into any
of the funds of the Smith Barney Mutual Funds listed above, which position the
shareholder would be expected to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an abusive
pattern of exchanges. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or other types of sales literature. 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
12
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
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 non-standard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund
calculates current dividend return for Class Z shares 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 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 Class Z shares' current return to yields published for
other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. or similar independent services that monitor the performance of
mutual funds or other industry publications. The Fund will include performance
data for Class Z shares in any advertisement or information including
performance data of the Fund.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all 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 and is a registered investment
adviser. SBMFM renders investment advice to a wide variety of
13
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
individual, institutional and investment company client, which had aggregate
assets under management as of January 31, 1996, in excess of $74 billion.
Subject to the supervision and direction of the Company's Board of
Directors, SBMFM manages the Fund's portfolio in accordance with the Fund's
stated investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment advisory services rendered, the Fund pays SBMFM a monthly
fee at the annual rate of 0.55% of the value of its average daily net assets.
PORTFOLIO MANAGEMENT
George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 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 .20% of the value of the Fund's
average daily net assets.
- --------------------------------------------------------------------------------
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
14
<PAGE>
Smith Barney
Special Equities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
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.
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.
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.
15
<PAGE>
(This page intentionally left blank.)
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group[Logo]
Smith Barney
Special
Equities
Fund
388 Greenwich Street
New York, New York 10013
FD
PROSPECTUS
SMITH BARNEY
Government
Securities
Fund
APRIL 29, 1996
Prospectus begins on page one
[Logo] Smith Barney Government Securities
Investing for your future.
Every day.
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus April 29, 1996
- --------------------------------------------------------------------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Government Securities Fund (the "Fund") has an investment
objective of high current return through investments that are issued or
guaranteed by the United States government, its agencies or instrumentalities
("U.S. government securities"). It may write covered call options and secured
put options and purchase put options on U.S. government securities. For hedging
purposes, the Fund may purchase and sell interest rate futures contracts and put
and call options thereon.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Investment Funds Inc. (the
"Company"). The Company is an open-end management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference. Shares of other funds offered by the Company are
described in separate Prospectuses that may be obtained by calling the Company
at the telephone number set forth above or by contacting a Smith Barney
Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated 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 Government Securities Fund
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 11
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 15
- --------------------------------------------------------------------------------
Valuation of Shares 22
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 23
- --------------------------------------------------------------------------------
Purchase of Shares 25
- --------------------------------------------------------------------------------
Exchange Privilege 34
- --------------------------------------------------------------------------------
Redemption of Shares 38
- --------------------------------------------------------------------------------
Minimum Account Size 41
- --------------------------------------------------------------------------------
Performance 41
- --------------------------------------------------------------------------------
Management of the Company and the Fund 42
- --------------------------------------------------------------------------------
Distributor 44
- --------------------------------------------------------------------------------
Additional Information 45
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current return by investing in U.S. government
securities. The Fund may write covered call options and secured put options and
purchase put options on U.S. government securities. The Fund may purchase and
sell interest rate futures contracts, and purchase and sell put and call options
on futures contracts, as a means of hedging against changes in interest rates.
See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of the sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares, is
offered only to investors meeting an initial investment minimum of $5,000,000.
See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the average daily net assets of
the Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
3
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares,
4
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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.
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,
5
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
"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 Shareholder Services Group.
Investment Minimums Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $50. See
"Purchase of Shares."
Systematic Investment Plan The Fund offers shareholders a Systematic 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 "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
6
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Trust 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 are declared
daily and paid on the last business day of the Smith Barney statement month.
Distributions of net realized long- and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they are
earned. See "Dividends, Distributions and Taxes."
Reinvestment of Dividends Dividends and distributions paid on shares of a Class
will be reinvested automatically, 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 value
of the Fund's investments, and hence the net asset value of Fund shares, will
fluctuate in response to changes in interest rates and market and economic
conditions. The Fund may enter into interest rate futures contracts and put and
call options thereon for hedging purposes, which may be subject to certain risks
in addition to those inherent in investments in the underlying securities. The
Fund may also employ other investment techniques which involve certain other
risks, including entering into repurchase agreements and lending portfolio
securities. See "Investment Objective and Management Policies -- Additional
Investments."
7
<PAGE>
Smith Barney Government Securities 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:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 4.50% 1.00% None
- ------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.55% 0.55% 0.55% 0.55%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses*** 0.14 0.15 0.12 0.14
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.94% 1.45% 1.37% 0.69%
==========================================================================================
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
*** 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 the shares are held through the Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily net
assets of Class A shares. Smith Barney also receives, with respect to Class B
shares, an annual 12b-1 fee of 0.75% of the value of average daily net assets of
that Class, consisting of a 0.50% distribution fee and a 0.25% service fee. For
Class C shares, Smith Barney receives an annual 12b-1 fee of 0.70% of the value
of average daily net assets of this Class, consisting of a 0.45% distribution
fee and a 0.25% service fee. "Other expenses" in the above table include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees.
8
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Company and the Fund."
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A $59 $78 $99 $160
Class B 65 76 89 160
Class C 24 43 75 165
Class Y 7 22 38 86
- ----------------------------------------------------------------------------------------------
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
Class A 59 78 99 160
Class B 15 46 79 160
Class C 14 43 75 165
Class Y 7 22 38 86
- ----------------------------------------------------------------------------------------------
</TABLE>
*Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may result in
an actual return 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.
9
<PAGE>
(This page intentionally left blank.)
10
<PAGE>
Smith Barney Government Securities 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. There is no information
presented for Class Y shares since there were no Class Y shares outstanding for
the periods shown.
For a Class A share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993(1) 1992(2)
======================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.17 $10.01 $9.69 $9.56
- --------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.67 0.52 0.81 0.10
Net realized and unrealized gain (loss) 0.62 (0.80) 0.23 0.13
- --------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.29 (0.28) 1.04 0.23
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.69) (0.49) (0.72) (0.08)
Capital -- (0.07) -- (0.02)
- --------------------------------------------------------------------------------------
Total Distributions (0.69) (0.56) (0.72) (0.10)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.77 $9.17 $10.01 $9.69
- --------------------------------------------------------------------------------------
Total Return++ 14.50% (2.76)% 10.87% 2.41%##
- --------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $453,378 $482,404 $7,067 $275
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) (4) 0.94% 1.00% 0.92% 0.68%+
Net investment income 6.70 6.18 7.76 6.24+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 294% 276% 540% 426%
======================================================================================
</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) The investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.10 and the expense ratio would have
been 1.12%.
(4) For the years ended December 31, 1994 and December 31, 1993 and the period
ended December 31, 1992, the expense ratios were calculated excluding
interest expense. The expense ratios including interest expense were 1.26%,
1.07% and 1.01% (annualized), respectively.
## Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
11
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993(1) 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.17 $10.01 $ 9.68 $10.20
- ----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.59 0.46 0.73 0.53
Net realized and unrealized
gain/(loss) 0.65 (0.78) 0.27 (0.02)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.24 (0.32) 1.00 1.34
- ----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.45) (0.67) (0.53)
In excess of net investment income -- -- -- --
Net realized gains -- -- -- --
Capital -- (0.07) -- (0.11)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.52) (0.67) (0.64)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.81 $ 9.17 $10.01 $9.68
- ----------------------------------------------------------------------------------------------
Total Return+ 13.87% (3.25)% 10.45% 5.45%
- ----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $158,459 $172,705 $851,350 $1,046,921
- ----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) (3) 1.45% 1.48% 1.40% 1.45%
Net investment income 6.19 5.69 7.28 5.47
- ----------------------------------------------------------------------------------------------
Portfolio Turnover Rate .294% .276% 540% 426%
- ----------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.11 $9.25 $8.75 $8.90 $10.41 $10.20
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.70 0.68 0.70 0.75 0.51 0.84
Net realized and unrealized
gain/(loss) 0.71 (0.08) 0.53 (0.16) (1.06) 0.50
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.41 0.60 1.23 0.59 (0.55) 1.34
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.63) (0.68) (0.70) (0.74) (0.51) (0.84)
In excess of net investment income -- -- -- -- (0.05) --
Net realized gains -- -- -- -- (0.40) (0.29)
Capital (0.08) (0.06) (0.03) -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.74) (0.73) (0.74) (0.96) (1.13)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.81 $9.11 $9.25 $8.75 $8.90 $10.41
- -----------------------------------------------------------------------------------------------------------------
Total Return+ 16.28% 6.99% 14.58% 6.75% (5.27)% 13.62%
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,285,937 $1,521,016 $2,001,740 $2,735,974 $4,383,816 $6,072,390
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) (3) 1.40% 1.43% 1.40% 1.34% 1.64% 1.56%
Net investment income 6.80 7.60 7.79 8.00 6.44 6.20
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 326% 274% 352% 281% 249% 353%
- -----------------------------------------------------------------------------------------------------------------
</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) The investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.01 and the expense ratio would have
been 1.61%.
(3) For the years ended December 31, 1994, December 31, 1993 and December 31,
1992, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense were 1.74%, 1.55% and 1.71%,
respectively.
+ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
13
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class C share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993(1)(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $9.17 $10.01 $ 9.90
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.60 0.49 0.68
Net realized and unrealized gain (loss) 0.65 (0.81) 0.04
- -------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.25 (0.32) 0.72
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.61) (0.45) (0.61)
Capital -- (0.07) --
- -------------------------------------------------------------------------------------------
Total Distributions (0.61) (0.52) (0.61)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.81 $ 9.17 $10.01
- -------------------------------------------------------------------------------------------
Total Return++ 13.93% (3.25)% 7.36%##
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,039 $646 $213
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) (4) 1.37% 1.47% 1.40%+
Net investment loss 6.27 5.71 7.28+
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 294% 276% 540%
- -------------------------------------------------------------------------------------------
</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 February 4, 1993 (inception date) to December 31, 1993.
(3) The investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.13 and the expense ratio would
have been 1.61%.
(4) For the year ended December 31, 1994 and the period ended December 31,
1993, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense were 1.72% and 1.55%
(annualized), respectively.
## Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
14
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
Investment Objective
The investment objective may not be changed without a majority vote of
shareholders of the Fund. There can be no assurance that the Fund will achieve
its investment objective.
The investment objective of the Fund is high current return. The Fund seeks
to achieve its investment objective by investing primarily in U.S. government
securities. U.S. government securities are obligations of, or are guaranteed by,
the U.S. government, its agencies or instrumentalities. These include bills,
certificates of indebtedness, and notes and bonds issued by the United States
Treasury or by agencies or instrumentalities of the United States government.
Some United States government securities, such as Treasury bills and bonds, are
supported by the full faith and credit of the United States Treasury; others are
supported by the right of the issuer to borrow from the United States Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the United States government to
purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association and the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. Mortgage
participation certificates issued by the FHLMC generally represent ownership
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 of the Fund will include Government
National Mortgage Association Certificates ("GNMA Certificates") which are
mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the United States government. While the United States
government guarantees the payment of principal and interest on GNMA
Certificates, the market value of the securities is not guaranteed and will
fluctuate. The Fund may write covered call options and secured put options and
purchase put options on U.S. government securities. The Fund also purchases and
sells interest rate futures contracts, and purchases and sells put and call
options on futures contracts, as a means of hedging against changes in interest
rates.
The Fund may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars, is not subject to foreign currency risk and, in most cases, is paid at
rates higher than most other U.S. government securities in recognition of the
foreign currency risk component of Exchange Rate-Related Securities.
15
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Fund may borrow money (up to 25% of its total assets) to increase its
investments, thereby leveraging its portfolio and exaggerating the effect on net
asset value of any increase or decrease in the market value of the Fund's
securities. See "Leverage through Borrowing." The Fund may enter into repurchase
agreements, reverse repurchase agreements and firm commitment agreements and
"short sales against the box" and may lend its portfolio securities. The total
of the Fund's direct borrowing and borrowings in connection with entering into
reverse repurchase agreements will not exceed 33 1/3% of the Fund's total
assets. Except when in a temporary defensive investment position, the Fund
intends to maintain at least 65% of its assets invested in U.S. government
securities (including futures contracts and options thereon and options relating
to U.S. government securities).
The Fund's distributions may consist of interest income from U.S.
government securities, premiums from expired put and call options written by the
Fund, net gains from closing purchase and sale transactions in options, futures
contracts or related options, and net gains from sales of portfolio securities
pursuant to options or otherwise. The investments of the Fund involve certain
special risks set forth in the description of those techniques in this
Prospectus and in the Statement of Additional Information.
The value of securities in which the Fund invests (and therefore the Fund's
net asset value per share) generally will vary inversely with changes in
interest rates and also will fluctuate in response to other factors.
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information.
Additional Investments
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week),
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the
16
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
repurchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Fund seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or part of the income from the
agreement. SBMFM, acting under the supervision of the Board of Directors,
reviews on an ongoing basis the creditworthiness and the value of the collateral
of those banks and dealers with which the Fund enters into repurchase agreements
to evaluate potential risks.
Reverse Repurchase Agreements. A reverse repurchase agreement involves the
sale of a money market instrument by the Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a
segregated account consisting of U.S. government securities or cash or cash
equivalents to cover its obligations under reverse repurchase agreements with
broker-dealers (but not banks). The Fund will invest the proceeds in other money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. Under the Investment Company Act
of 1940, as amended (the "1940 Act"), reverse repurchase agreements may be
considered borrowings by the seller; accordingly, the Fund will limit its
investments in reverse repurchase agreements and other borrowings to no more
than 33 1/3% of its total assets.
Firm Commitment Agreements and When-Issued Purchases. Firm commitment
agreements and when-issued purchases call for the purchase of securities at an
agreed-upon price on a specified future date, and would be used, for example,
when a decline in the yield of securities of a given issuer is anticipated. The
Fund as purchaser assumes the risk of any decline in value of the security
beginning on the date of the agreement or purchase. The Fund will not use such
transactions for leveraging purposes, and accordingly will segregate U.S.
government securities, cash or cash equivalents in an amount sufficient to meet
its purchase obligations under the agreement.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and obtain
the return of the securities loaned; (c) the Fund will receive any interest or
dividends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of
the Fund.
17
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
Options Activities. The Fund may write (i.e., sell) call options ("calls")
if the calls are "covered" throughout the life of the option. A call is
"covered" if the Fund owns the optioned securities, if the Fund maintains in a
segregated account with the Company's custodian cash, cash equivalents or U.S.
government securities with a value sufficient to meet its obligations under the
call, or if the Fund owns an offsetting call option. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the
underlying security at any time during the call period (usually not more than
nine months in the case of common stock or fifteen months in the case of U.S.
government securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund foregoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase call options on securities. However, the
Fund may only purchase a call on securities to effect a "closing purchase
transaction," which is the purchase of a call covering the same underlying
security and having the same exercise price and expiration date as a call
previously written by the Fund on which it wishes to terminate its obligation.
The Fund also may write and purchase put options ("puts"). When the Fund
writes a put, it receives a premium and gives the purchaser of the put the right
to sell the underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. The Fund will not purchase puts on
securities if more than 10% of its net assets would be invested in premiums on
puts.
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash, cash equivalents or U.S. government
securities with a value equal to the exercise price in a segregated account or
holds a put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by the
Fund will not exceed 50% of its net assets. The Fund also writes "straddles,"
which are combinations of secured puts and covered calls on the same underlying
security.
18
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 "Dividends,
Distributions and Taxes."
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, it is difficult to predict
to what extent liquid markets will develop or continue. See below for a
discussion of the purchase by the Fund of options on futures contracts. See the
Statement of Additional Information for further discussion of risks involved in
options trading, and particular risks applicable to options trading on U.S.
government securities, including risks involved in options trading on GNMA
Certificates.
Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts ("futures contracts") as a hedge against changes in
interest rates. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. Futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
futures contracts based on securities such as long-term Treasury bonds, Treasury
notes, GNMA Certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. government securities and
SBMFM anticipates a rise in long-term interest rates, it could, in lieu of
disposing of its portfolio securities, enter into futures contracts for the sale
of similar long-term securities. If interest rates increased and the value of
the Fund's securities declined, the value of the Fund's futures contracts would
increase, thereby protecting the Fund by preventing the net asset value from
declining as much as it otherwise would have. Similarly, entering into futures
contracts for the purchase of securities has an effect similar to actual
purchase of the underlying securities, but permits the continued holding of
securities other than the underlying securities. For example, if SBMFM expects
long-term interest rates to decline, the Fund might enter into futures contracts
for the purchase of long-term securities, so that it could gain rapid market
exposure that may offset anticipated increases in the cost of securities it
intends to purchase, while continuing to hold higher-yielding short-term
19
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
securities or waiting for the long-term market to stabilize.
The Fund also may purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put),
at a specified exercise price at any time during the option period. When an
option on a futures contract is exercised, delivery of the futures position is
accompanied by cash representing the difference between the current market price
of the futures contract and the exercise price of the option. The Fund may
purchase put options on interest rate futures contracts in lieu of, and for the
same purpose as, the sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract in
the same manner as it purchases "protective puts" on securities. The purchase of
call options on interest rate futures contracts is intended to serve the same
purpose as the actual purchase of the futures contract, and the Fund will set
aside cash or cash equivalents sufficient to purchase the amount of portfolio
securities represented by the underlying futures contracts. See "Options
Activities" and "Dividends, Distributions and Taxes."
The Fund may not purchase futures contracts or related options if,
immediately thereafter, more than 30% of the Fund's total assets would be so
invested. In purchasing and selling futures contracts and related options, the
Fund will comply with rules and interpretations of the Commodity Futures Trading
Commission ("CFTC"), under which the Company is excluded from regulation as a
"commodity pool." CFTC regulations permit use of commodity futures and options
for bona fide hedging purposes without limitations on the amount of assets
committed to margin and option premiums.
The Fund will not engage in transactions involving futures contracts or
related options for speculation but only as a hedge against changes in the
market values of debt securities held, or intended to be purchased, by the Fund
and where the transactions are appropriate to reduction of the Fund's risks. The
Fund's futures transactions will be entered into for traditional hedging
purposes -- that is, futures contracts will be sold (or related put options
purchased) to protect against a decline in the price of securities that the Fund
owns, or futures contracts (or related call options) will be purchased to
protect the Fund against an increase in the price of securities it is committed
to purchase.
There is no assurance that the Fund will be able to close out its futures
positions at any time, in which case it would be required to maintain the margin
deposits on the contract. There can be no assurance that hedging transactions
will be successful,
20
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
as there may be an imperfect correlation (or no correlation) between movements
in the prices of the futures contracts and of the debt securities being hedged,
or price distortions due to market conditions in the futures markets. Where
futures contracts are purchased to hedge against an increase in the price of
long-term securities, but the long-term market declines and the Fund does not
invest in long-term securities, the Fund would realize a loss on the futures
contracts, which would not be offset by a reduction in the price of securities
purchased. Where futures contracts are sold to hedge against a decline in the
price of the Fund's long-term securities but the long-term market advances, the
Fund would lose part or all of the benefit of the advance due to offsetting
losses in its futures positions.
Foreign Currency Risks. The Fund has the ability to invest up to 5% of its
net assets in U.S. government securities where the principal repayment amount
may be increased or decreased due to fluctuations of foreign currency exchange
rates.
Leverage through Borrowing. The Fund may borrow up to 25% of the value of
its net assets on an unsecured basis from banks to increase its holdings of
portfolio securities or to acquire securities to be placed in a segregated
account with the custodian for various purposes (e.g. to secure puts written by
the Fund). The Fund is required to maintain continuous asset coverage of 300%
with respect to such borrowings, and to sell (within three days) sufficient
portfolio holdings to restore such coverage, if it should decline to less than
300% due to market fluctuations or otherwise, even if it is disadvantageous from
an investment standpoint. Leveraging will exaggerate the effect of any increase
or decrease in the value of portfolio securities on the Fund's net asset value,
and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest and option premiums received from the
securities purchased with borrowed funds.
American Depositary Receipts. The Fund may purchase foreign securities and
American Depositary Receipts ("ADRs"), which are dollar-denominated receipts
issued generally by domestic banks and representing the deposit with the bank of
a security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States.
Portfolio Transactions and Turnover
SBMFM arranges for the purchase and sale of the Fund's securities and
selects brokers and dealers (including Smith Barney) which, in its best
judgment, provide prompt and reliable execution at favorable prices and
reasonable commission rates. SBMFM may select brokers and dealers which provide
it with research services and
21
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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. United
States over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Securities for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors. Notwithstanding the above, bonds
and other fixed-income securities are valued by using market quotations and may
be valued on the basis of prices provided by a pricing service approved by the
Board of Directors.
When the Fund writes a put or call option, it records the premium received
as an asset and equivalent liability, and thereafter adjusts the liability to
the market value of the option determined in accordance with the preceding
paragraph. The premium paid for an option purchased by the Fund is recorded as
an asset and subsequently adjusted to market value.
22
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund will be treated separately from the Company's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
The Fund declares dividends daily consisting of estimated daily net
investment income, and pays dividends monthly. Any net realized gains, after
utilization of capital loss carryforwards, will be distributed at least
annually, and net realized short-term capital gains (including short-term
capital gains from options transactions, if any) may be paid more frequently,
with the distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends and capital gains
will be reinvested automatically in additional shares of the same Class at net
asset value subject to no sales charge or CDSC. Dividends and distributions are
treated the same for tax purposes whether taken in cash or reinvested in
additional shares. The per share dividends and distributions on Class B and
Class C shares may be lower than the per share dividends on Class A and Class Y
shares principally as a result of the distribution fee applicable with respect
to Class B and Class C shares. The per share dividends on Class A shares of the
Fund may be lower than the per share dividends on Class Y shares principally as
a result of the service fee applicable to Class A shares. Distributions of
capital gains, if any, will be in the same amount for Class A, Class B, Class C
and Class Y shares. In addition, as determined by the Board of Directors,
distributions of the Fund may include a return of capital. Shareholders will be
notified of the amount of any distribution that represents a return of capital.
In order to comply with a calendar year distribution requirement under the Code,
it may be necessary for the Fund to make distributions at times other than those
set forth above.
Taxes
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide basis.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Code. In any taxable year in which the Fund so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses), the Fund (but
not its shareholders) generally will be relieved of Federal income tax on the
investment company taxable
23
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
income and net realized capital gains (the excess of net long-term capital gains
over net short-term capital losses), if any, distributed to shareholders. In
order to qualify as a regulated investment company, the Fund will be required to
meet various Code requirements.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital gains dividends are taxable to shareholders as
long-term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
Dividends (including capital gains dividends) declared by the Fund in
October, November or December of any calendar year to shareholders of record on
a date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from U.S. government securities may be exempt from all
state and local income taxes. Shareholders should consult their tax advisors for
specific information on the tax consequences of particular types of
distributions.
24
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
General
The Fund offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Series Inc., for which
there is no minimum purchase amount). See "Prospectus Summary -- Alternative
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
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, 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. Orders
received by
25
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
dealers or Introducing Brokers prior to the close of regular trading
on the NYSE on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day, provided the order is
received by Smith Barney prior to Smith Barney's close of business (the "trade
date"). 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.
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
Sales Sales Dealer's
Charge as % Charge as % Reallowance as %
Amount of Investment of Offering Price of Amount Invested of Offering Price
======================================================================================
<S> <C> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.05%
$25,000 - $49,999 4.00% 4.17% 3.60%
$50,000 - $99,999 3.50% 3.63% 3.15%
$100,000 - $249,999 2.50% 2.56% 2.25%
$250,000 - $499,999 1.50% 1.52% 1.35%
$500,000 and over * * *
======================================================================================
</TABLE>
*Purchases of Class A shares, which when combined with current holdings of Class
A shares offered with a sales charge equal or exceed $500,000 in the aggregate,
will be made at net asset value without any initial sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The CDSC on Class A shares is payable to Smith Barney, which compensates Smith
Barney Financial Consultants and other dealers whose clients make purchases of
$500,000 or more. The CDSC is waived in the same circumstances in which the
CDSC applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
26
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privileges."
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales 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.
27
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
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,
28
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds offered with a sales charge over the 13 month period based on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sale charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or 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.
29
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Deferred Sales Charge Alternatives
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares, which when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gains distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of Shares
- --Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
Year Since Purchase
Payment Was Made CDSC
===============================================================================
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
===============================================================================
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to
30
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
any distribution fees. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of Class B shares (other than Class B Dividend Shares) owned by the
shareholder. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July 15,
1994 and who subsequently exchange those shares for Class B shares of the Fund
will be offered the opportunity to exchange all such Class B shares for Class A
shares of the Fund four years after the date on which those shares were deemed
to have been purchased. Holders of such Class B shares will be notified of the
pending exchange in writing approximately 30 days before the fourth anniversary
of the purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Prospectus
Summary -- Alternative Purchase Arrangements -- Class B Shares Conversion
Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were 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
31
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with a combination of the Fund with any
investment company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by 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.
32
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class B Shares. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to exchange all of its
Class B shares for Class A shares of the Fund. Such Plans will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the enrollment date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the eighth anniversary date. Once
the exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 will be subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program if its total Class C holdings equal at least $500,000 as of the calendar
year-end, the Participating Plan will be offered the opportunity to exchange all
of its Class C shares for Class A shares of the Fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year, and unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
Class Y Shares. Class Y shares of the Fund are offered without any service
or distribution fees, sales charge or CDSC to any Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
33
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gains
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by
an employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
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.
34
<PAGE>
Smith Barney Government Securities 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 Special Equities Fund
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 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
Smith Barney Muni Funds -- New York Portfolio
35
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
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 charged
by other Smith Barney Mutual Funds will be subject to the appropriate
36
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
"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 listed above, which position the
shareholder would be expected to
37
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
maintain 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
Investment Company Act of 1940, as amended ("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
38
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
may take up to ten days or more. Shares held by
Smith Barney as custodian must be redeemed by submitting a written request to a
Smith Barney Financial Consultant.
Shares other than those held by Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Introducing Broker or dealer in the
selling group or by submitting a written request for redemption to:
Smith Barney Government Securities Fund
Class A, B, C or Y (please specify)
c/o 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. 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 subject to the CDSC at the time the withdrawal plan
commences. For further
39
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must 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) any day on which the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are processed at the net asset
value next determined.
40
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Yield
From time to time, the Fund advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
Total Return
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and
41
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
Class Y shares of the Fund. These figures are based on historical earnings and
are not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if any,
from the initial amount invested and reinvestment of all income dividends and
capital gains distributions on the reinvestment dates at prices calculated as
stated in this Prospectus, then dividing the value of the investment at the end
of the period so calculated by the initial amount invested and subtracting 100%.
The standard average annual total return, as prescribed by the SEC, is derived
from this total return which provides the ending redeemable value. Such standard
total return information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund
calculates current dividend return for each Class by annualizing the most recent
monthly distribution and dividing by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period for which
current dividend return is presented. The current dividend return for each Class
may vary from time to time depending on market conditions, the composition of
its investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. The Fund may also include
comparative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services, Inc.
or similar independent services that monitor the performance of mutual funds, or
other industry publications.
- --------------------------------------------------------------------------------
Management of the Company and the Fund
- --------------------------------------------------------------------------------
Board of Directors
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services to the
Company and the Fund, including agreements with the Fund's 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.
42
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Management of the Company and the Fund (continued)
- --------------------------------------------------------------------------------
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 investment companies which had aggregate assets under management as of
January 31, 1996 in excess of $74 billion.
Subject to the supervision and direction of the Company's Board of
Directors, SBMFM manages the Fund's portfolio in accordance with the Fund's
stated investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment advisory services rendered, the Fund pays SBMFM a fee at
the following annual rates of average daily net assets: 0.35% up to $2 billion,
0.30% of the next $2 billion, 0.25% of the next $2 billion, 0.20% of the next $2
billion and 0.15% of net assets thereafter. For the fiscal year ended December
31, 1995, SBMFM was paid investment advisory fees equal to 0.35% of the value of
the Fund's average daily net assets.
Portfolio Management
James E. Conroy, Managing Director of SBMFM, has served as First Vice
President and Investment Officer of the Fund since the Fund's commencement of
operations (March 20, 1984) and manages the day-to-day operations of the Fund,
including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 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
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the annual rate of 0.20% of the value of the Fund's average daily
net assets.
43
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class B and Class C shares at the
annual rate of 0.50% and 0.45%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no longer be
subject to distribution fees. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale with respect to Class A, Class B and Class C shares, and a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan 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.
44
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, C
and Y, with a par value of $.001 per share. Each Class of shares has the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
PNC Bank located at 17th and Chestnut Streets, Philadelphia, PA 19103
serves as custodian of the Company'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 its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Company plans to consolidate the mailing of its semi-annual
and annual reports by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single copy of each report. In addition, the Company also plans to consolidate
the mailing of its Prospectuses so that a shareholder having multiple accounts
(i.e., individual, IRA and/or Self-Employed Retirement Plan accounts) will
receive a single Prospectus annually. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultants or FDISG.
45
<PAGE>
SMITH BARNEY
A Member of Travelers Group[Logo}
Smith Barney
Government
Securities
Fund
388 Greenwich Street
New York, New York 10013
FD 0234 4/96
<PAGE>
SMITH BARNEY INVESTMENT FUNDS INC.
Investment Grade Bond Fund
PROSPECTUS APRIL 29, 1996
- --------------------------------------------------------------------------------
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
(800) 544-5445
Smith Barney Investment Grade Bond Fund (the "Fund") has an investment objec-
tive of high current income consistent with prudent investment management and
preservation of capital by investing in bonds and other income-producing secu-
rities.
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 Company
and the Fund, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 29, 1996, as amended or supple-
mented 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 an Investments Representative of PFS Investments Inc.
("PFS Investments"). 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.
PFS DISTRIBUTORS, 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.
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
TABLE OF CONTENTS DATE
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
- -------------------------------------------------
VALUATION OF SHARES 16
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 17
- -------------------------------------------------
PURCHASE OF SHARES 19
- -------------------------------------------------
EXCHANGE PRIVILEGE 25
- -------------------------------------------------
REDEMPTION OF SHARES 27
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 29
- -------------------------------------------------
PERFORMANCE 29
- -------------------------------------------------
MANAGEMENT OF THE FUND 31
- -------------------------------------------------
DISTRIBUTOR 32
- -------------------------------------------------
ADDITIONAL INFORMATION 34
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in any such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY DATE
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See the "Table of Contents".
INVESTMENT OBJECTIVE. The Fund is an open-end, diversified management
investment company that seeks to provide as high a level of current income as
is consistent with prudent investment management and preservation of capital.
Under normal circumstances, the Fund will invest at least 65% of its assets in
bonds. See "Investment Objective and Management Policies".
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers two classes of shares
("Classes") to investors purchasing through PFS Investments Representatives
designed to provide them with the flexibility of selecting an investment best
suited to their needs--the two Classes of shares available are: Class A shares
and Class B shares. See "Purchase of Shares" and "Redemption of Shares". In
addition to Class A and Class B shares, the Fund offers Class C and Class Y
shares to investors purchasing through Smith Barney Inc. ("Smith Barney"), a
distributor of the Fund. Those shares have different sales charges and other
expenses than Class A and Class B shares which may affect performance.
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within 12 months of
purchase. See "Prospectus Summary--Reduced or No Initial Sales Charge".
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.25% and an annual distribution fee of 0.50% of the average daily net
assets of this Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY (CONTINUED) DATE
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".
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates 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 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 this Class. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
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 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 shares, purchasers eligible to
purchase Class A shares at net asset value or at a reduced sales charge should
consider doing so.
PFS Investments Representatives may receive different compensation for sell-
ing each Class of shares. Investors should understand that the purpose of the
4
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY (CONTINUED) DATE
CDSC on the Class B shares is the same as that of the initial sales charge on
the Class A shares.
See "Purchase of Shares" and "Management of the Company and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares", "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
PURCHASE OF SHARES. Shares may be purchased through the Fund's distributor, PFS
Distributors, Inc. ("PFS"). See "Purchase of Shares".
INVESTMENT MINIMUMS. Investors in Class A and Class B 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. The initial investment amount will be waived for accounts establishing a
Systematic Investment Plan. Subsequent investments of at least $25 may be made
for both Classes. The minimum initial and subsequent investment requirement for
both Classes through the Systematic Investment Plan described below is $25. See
"Purchase of Shares".
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount of at least
$25. 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. (the
"Manager") serves as the Fund's investment adviser. The Manager provides
investment advisory and management services to investment companies affiliated
with Smith Barney. The Manager 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. The Manager also serves as the Fund's
administrator. See "Management of the Fund".
5
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY (CONTINUED) DATE
EXCHANGE PRIVILEGE. Shares of a Class may be exchanged for shares of the same
class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge
differential. See "Exchange Privilege".
VALUATION OF SHARES. Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from PFS Shareholder Services (the "Sub-Transfer Agent"). See "Valuation of
Shares".
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are declared
monthly and paid on the last Friday of each month. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually. See "Dividends, Distributions and Taxes".
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares of a
Class will be reinvested automatically in additional shares of the same Class
at current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes".
RISK FACTORS AND SPECIAL CONSIDERATIONS. The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after
a short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The Fund
may employ investment techniques which involve certain risks, including
entering into repurchase agreements and reverse repurchase agreements, lending
portfolio securities, selling securities short and investing in foreign
securities through the use of American Depositary Receipts. See "Investment
Objective and Management Policies--Additional Investments".
6
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY (CONTINUED) DATE
THE FUND'S EXPENSES. The following expense table lists the costs and estimated
expenses that an investor will incur either directly or indirectly as a
shareholder of the Fund, based on the maximum sales charge or maximum CDSC
that may be incurred at the time of purchase or redemption and the Fund's
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
Maximum sales charge imposed on purchases
(as a percentage of offering price)......................... 4.50% NONE
Maximum CDSC (as a percentage of original cost or redemption
proceeds, whichever is lower)............................... NONE* 4.50%
- -------------------------------------------------------------------------------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees............................................... 0.65% 0.65%
12b-1 fees**.................................................. 0.25 0.75
Other expenses................................................ 0.21 0.21
- -------------------------------------------------------------------------------
Total Fund Operating Expenses................................ 1.11% 1.61%
</TABLE>
- -------------------------------------------------------------------------------
* Purchase of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the aggregate, will be made at net asset value with no sales charge, but
will be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee.
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 and certain Class A shares, the length of time the shares
are held. See "Purchase of Shares" and "Redemption of Shares". PFS receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. With respect to Class B shares, PFS receives an annual 12b-1
fee of 0.75% of the value of average daily net assets of that Class, consist-
ing of a 0.25% service fee and a 0.50% distribution fee. "Other expenses" in
the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
7
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE.
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares", "Redemption of Shares"
and "Management of the Fund".
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A..................................... $56 $79 $103 $174
Class B..................................... 61 81 98 178
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $56 $79 $103 $174
Class B..................................... 16 51 88 178
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
8
<PAGE>
SMITH BARNEY
Investment Grade Bond 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.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1995(1) 1994(1) 1993(1) 1992(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.67 $13.01 $11.89 $11.67
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) 2.80 (1.88) 1.27 0.23
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.63 (1.14) 2.15 0.37
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.89) (0.86) (0.88) (0.14)
Overdistribution of net investment
income -- -- (0.01) --
Net realized gains (0.16) (0.31) (0.14) --
Capital -- (0.03) -- (0.01)
- --------------------------------------------------------------------------------
Total Distributions (1.05) (1.20) (1.03) (0.15)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.25 $10.67 $13.01 $11.89
- --------------------------------------------------------------------------------
TOTAL RETURN++ 35.29% (8.95)% 18.45% 3.25%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $226,373 $181,334 $10,136 $933
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 1.11% 1.11% 1.11% 1.03%+
Net investment income 7.02 7.35 6.67 7.53+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 18% 65% 47%
- --------------------------------------------------------------------------------
</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 will results
of operations.
(2) For the period from November 6, 1992 (inception data) to December 31,
1992.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense would have been
1.04% (annualized).
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
++ Total return represents the aggregate total return for the period
indicated and does not reflect any applicable sales charges.
9
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1995(1) 1994(1) 1993(1) 1992 1991
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $ 10.67 $ 13.01 $ 11.89 $ 11.80 $ 10.43
- ---------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.77 0.82 0.80 0.83 0.86
Net realized and unrealized
gain (loss) 2.80 (2.02) 1.29 0.12 1.38
- ---------------------------------------------------------------------------------
Total Income (Loss) From
Operations 3.57 (1.20) 2.09 0.95 2.24
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.83) (0.80) (0.82) (0.83) (0.87)
Overdistribution of
investment net income -- -- (0.01) -- --
Net realized gains (0.16) (0.31) (0.14) -- --
Capital -- (0.03) -- (0.03) --
- ---------------------------------------------------------------------------------
Total Distributions (0.99) (1.14) (0.97) (0.86) (0.87)
- ---------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.80
- ---------------------------------------------------------------------------------
TOTAL RETURN++ 34.63% (9.41)% 18.06% 8.36% 22.50%
- ---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $288,533 $221,120 $476,088 $431,783 $413,878
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.61% 1.57% 1.58% 1.57%* 1.53%
Net investment income 6.51 6.89 6.20 6.99 7.90
- ---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 18% 65% 47% 82%
- ---------------------------------------------------------------------------------
</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.
++Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
* For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.58%.
** Annualized expense ratio before waiver of fees by the distributor for the
years ended December 31, 1989 and 1988 were 1.66% and 1.57%, respectively.
*** Net investment income before waiver of fees by the distributor would have
been $0.86 and $0.87 for the years ended December 31, 1989 and 1988,
respectively.
10
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$11.01 $10.33 $10.55 $12.91 $12.00
- -----------------------------------------------------------------------------------------
0.86 0.87*** 0.90*** 0.89 1.10
(0.57) 0.68 (0.24) (1.24) 1.16
- -----------------------------------------------------------------------------------------
0.29 1.55 0.66 (0.35) 2.26
- -----------------------------------------------------------------------------------------
(0.87) (0.87) (0.88) (1.12) (1.10)
-- -- -- -- --
-- -- -- (0.89) (0.25)
-- -- -- -- --
- -----------------------------------------------------------------------------------------
(0.87) (0.87) (0.88) (2.01) (1.35)
- -----------------------------------------------------------------------------------------
$10.43 $11.01 $10.33 $10.55 $12.91
- -----------------------------------------------------------------------------------------
2.98% 15.57% 6.43% (2.83)% 19.54%
- -----------------------------------------------------------------------------------------
$405,779 $483,382 $532,794 $705,561 $421,011
- -----------------------------------------------------------------------------------------
1.58% 1.63%** 1.22%** 1.62% 1.62%
8.20 8.07 8.74 7.96 7.74
- -----------------------------------------------------------------------------------------
59% 118% 72% 79% 211%
- -----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set forth below is a description of the investment objective and policies of
the Fund. There can be no assurance that the Fund will achieve its investment
objective. Certain instruments and techniques discussed in this summary are
described in greater detail in this Prospectus under "Additional Investments"
and in the Statement of Additional Information. A description of the rating
systems of Moody's Investors Services Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") is contained in the Appendix to the Statement of Addi-
tional Information.
The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions and the
Fund's investment objective are fundamental policies, which means that they
may not be changed without a majority vote of shareholders of the Fund. Except
for the objective and those restrictions specifically identified as fundamen-
tal, 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" securi-
ties (which includes repurchase agreements with more than seven days to matu-
rity), and (c) investing more than 25% of the Fund's total assets in the secu-
rities of issuers in a particular industry (with exceptions for securities
guaranteed by the United States government, its agencies or instrumentalities
("U.S. government securities") and certain money market instruments).
The Fund's investment objective is to provide as high a level of current
income as is consistent with prudent investment management and preservation of
capital. The Fund seeks to achieve its objective by investing in any of the
following securities; corporate bonds rated Baa or better by Moody's or BBB or
better by S&P; U.S. government securities; commercial paper issued by domestic
corporations and rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or,
if not rated, issued by a corporation having an outstanding debt issue rated
Aa or better by Moody's or AA or better by S&P; negotiable bank certificates
of deposit and bankers' acceptances issued by domestic banks (but not their
foreign branches) having total assets in excess of $1 billion; and high-
yielding common stocks and warrants. Obligations rated in the lowest of the
top four rating categories (Baa by Moody's or BBB by S&P) may have specula-
12
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED) DATE
tive characteristics and changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments, including a greater possibility of default or bankruptcy of the issu-
er, than is the case with higher grade bonds. Subsequent to its purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced
below the minimum required for the purchase by the Fund. In addition, it is
possible that Moody's and S&P might not timely change their ratings of a par-
ticular issue to reflect subsequent events. None of these events will require
the sale of the securities by the Fund, although the Manager will consider
these events in determining whether the Fund should continue to hold the secu-
rities. 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
objectives and policies of the Fund.
The Fund may enter into repurchase agreements, reverse repurchase agreements,
firm commitment agreements, "short sales against the box" and may lend its
portfolio securities. Except when in a temporary defensive investment position,
the Fund intends to maintain at least 65% of its assets invested in bonds.
The value of securities in which the Fund invests (and therefore, the Fund's
net asset value per share) generally will vary inversely with changes in inter-
est rates and also will fluctuate according to changes in market conditions and
other factors.
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under "Invest-
ment Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of, or
are guaranteed by, the United States government, its agencies or instrumentali-
ties. 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 U.S. Trea-
sury 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 Mort-
13
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED) DATE
gage 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 instru-
mentality. 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 transac-
tions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
The Fund bears a risk of loss in the event that the other party to a repur-
chase agreement defaults on its obligations and the Fund is delayed or pre-
vented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying secu-
rities during the period while the Fund seeks to assert its rights to them,
the risk of incurring expenses associated with asserting those rights and the
risk of losing all or part of the income from the agreement. The Manager, act-
ing under the supervision of the Board of Directors, review on an ongoing
basis the creditworthiness and the value of the collateral of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
14
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED) DATE
Reverse Repurchase Agreements. A reverse repurchase agreement involves the
sale of a money market instrument by the Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a segre-
gated account consisting of U.S. government securities or cash or cash equiva-
lents to cover its obligations under reverse repurchase agreements with broker-
dealers (but not banks). The Fund will invest the proceeds in other money mar-
ket instruments or repurchase agreements maturing not later than the expiration
of the reverse repurchase agreement. Under the Investment Company Act of 1940,
as amended (the "1940 Act"), reverse repurchase agreements may be considered
borrowings by the seller; accordingly, the Fund will limit its investments in
reverse repurchase agreements and other borrowings to no more than 33 1/3% of
its total assets. Firm Commitment Agreements and When-Issued Purchases. Firm
commitment agreements and when-issued purchases call for the purchase of secu-
rities at an agreed-upon price on a specified future date, and would be used,
for example, when a decline in the yield of securities of a given issuer is
anticipated. The Fund as purchaser assumes the risk of any decline in value of
the security beginning on the date of the agreement or purchase. The Fund will
not use such transactions for leveraging purposes, and accordingly will segre-
gate U.S. government securities, cash or cash equivalents in an amount suffi-
cient to meet its purchase obligations under the agreement.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily marked-
to-market basis in an amount at least equal to the current market value of the
securities loaned; (b) the Fund may at any time call the loan and obtain the
return of the securities loaned; (c) the Fund will receive any interest or div-
idends 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. The risks in lending portfolio securities, as with other extensions
of secured credit, consists of possible delays in receiving additional collat-
eral 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 the Manager to be in good standing and will not be made unless, in
the judgement of the Manager, the consideration to be earned from such loans
would justify the risk.
Short Sales. The Fund may sell securities short "against the box". While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable with-
out
15
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED) DATE
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Manager arranges for the purchase and sale of the Fund's securities and
selects broker-dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable com-
mission rates. The Manager may select broker-dealers which provide it with
research services and may cause the Fund to pay such broker-dealers commissions
which exceed those other broker-dealers may have charged, if it views the com-
missions 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 fis-
cal 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 total number of shares of
the Class outstanding.
A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there were no
sales during the day, at the current quoted bid price. In cases where securi-
ties are traded on more than one exchange, the securities are valued on the
16
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
VALUATION OF SHARES (CONTINUED) DATE
exchange designated by or under the authority of the Board of Directors as the
primary market. Fund securities which are primarily traded on foreign
exchanges may be valued with the assistance of a pricing service and are gen-
erally valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
foreign security is valued is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Directors. Unlisted foreign securi-
ties are valued at the mean between the last available bid and offer price
prior to the time of valuation. U.S. over-the-counter securities will be val-
ued on the basis of the bid price at the close of business on each day. Secu-
rities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors. 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. Any assets or liabilities initially expressed in terms of foreign
currencies will be converted into U.S. dollar values at the mean between the
bid and offered quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders. The Fund declares dividends monthly
consisting of estimated daily net investment income, and pays dividends month-
ly. Any net realized long-term capital gains, after utilization of capital
loss carryforwards, will be distributed at least annually. Net realized short-
term capital gains may be paid with the distribution of dividends from net
investment income.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value subject to no sales charge or CDSC. In order to
avoid the application of a 4.00% nondeductible excise tax on certain undis-
tributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 in each year of any
undistrib-
17
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) DATE
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed current
and accumulated earnings and profits, the excess distributions may be treated
as a taxable dividend or as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
or her shares. Pursuant to the requirements of the 1940 Act and other applica-
ble laws, a notice will accompany any distribution paid from sources other
then net investment income. In the event the Fund distributes amounts in
excess of its net investment income and net realized capital gains, such dis-
tributions may have the effect of decreasing the Fund's total assets, which
may increase the Fund's expense ratio.
The per share dividends on Class B shares may be lower than the per share
dividends on Class A shares principally as a result of the distribution fee
applicable with respect to Class B shares. Distributions of capital gains, if
any, will be in the same amount for Class A and Class B shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify as a "regu-
lated investment company" under the Code. In any taxable year in which the
Fund so qualifies and distributes at least 90% of its investment company tax-
able 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 regu-
lated investment company, the Fund will be required to meet various Code
requirements.
Distributions of any investment company taxable income are taxable to share-
holders 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.
18
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) DATE
Dividends (including capital gains dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions, and gains
realized upon a disposition of Fund shares, may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends, 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 two Classes of shares to investors purchasing through PFS
Investments Representatives. Class A shares are sold to investors with an ini-
tial sales charge and Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to con-
sider in selecting which Class of shares to purchase.
Initial purchases of Fund shares must be made through a PFS Investments Rep-
resentative by completing the appropriate application found in the prospectus.
The completed application should be forwarded to the Sub-Transfer Agent, 3100
Breckinridge Blvd., Bldg 200, Duluth, Georgia 30199-0062. Checks
19
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED) DATE
drawn on foreign banks must be payable in U.S. dollars and have the routing
number of the U.S. bank encoded on the check. Subsequent investments may be
sent directly to the Sub-Transfer Agent.
Investors in Class A and Class B 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. The initial investment amount
will be waived for accounts establishing a Systematic Investment Plan. Subse-
quent investments of at least $25 may be made for both Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) of the Code, the
minimum initial and subsequent investment requirement for both Classes in the
Fund is $25. 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 Sub-Transfer Agent. Share certifi-
cates are issued only upon a shareholder's written request to the Sub-Transfer
Agent.
Purchase orders received by the Sub-Transfer Agent prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day.
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, the Sub-Transfer Agent is authorized through pre-
authorized transfers of $25 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or quar-
terly 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 PFS or the Sub-Transfer Agent.
20
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED) DATE
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $ 25,000 4.50% 4.71% 4.05%
$ 25,000 - $ 49,999 4.00% 4.17% 3.60%
$ 50,000 - $ 99,999 3.50% 3.63% 3.15%
$100,000 - $249,999 2.50% 2.56% 2.25%
$250,000 - $499,999 1.50% 1.52% 1.35%
$500,000 - AND OVER * * *
- ---------------------------------------------------------------------------
</TABLE>
* PURCHASES OF CLASS A SHARES, WHICH WHEN COMBINED WITH CURRENT HOLDINGS OF
CLASS A SHARES OFFERED WITH A SALES CHARGE, EQUAL OR EXCEED $500,000 IN THE
AGGREGATE, WILL BE MADE AT NET ASSET VALUE WITHOUT ANY INITIAL SALES CHARGE,
BUT WILL BE SUBJECT TO A CDSC OF 1.00% ON REDEMPTIONS MADE WITHIN 12 MONTHS
OF PURCHASE. THE CDSC ON CLASS A SHARES IS PAYABLE TO PFS, WHICH IN TURN
PAYS PFS INVESTMENTS TO COMPENSATE ITS INVESTMENTS REPRESENTATIVES 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 SHARES IS WAIVED. SEE
"DEFERRED SALES CHARGE ALTERNATIVES" AND "WAIVERS OF CDSC".
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales 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, prof-
it-sharing or other benefit plan for such persons and (ii) employees of mem-
bers 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) shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another fund in 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; (d) accounts managed by registered
investment advisory subsidiaries of Travelers; and (e) sales through PFS
Investments Representatives where the amounts invested represent the redemp-
tion proceeds from investment
21
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED) DATE
companies distributed by an entity other than PFS, on the condition that (i)
the redemption has occurred no more than 60 days prior to the purchase of the
shares, (ii) the shareholder paid an initial sales charge on such redeemed
shares and (iii) the shares redeemed were not subject to a deferred sales
charge. PFS Investments may pay its Investments Representatives an amount equal
to 0.40% of the amount invested if the purchase represents redemption proceeds
from an investment company distributed by an entity other than PFS. 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.
VOLUME DISCOUNTS
The "Amount of Investment" referred to in the sales charge table set forth
above under "Initial Sales Charge Alternative--Class A Shares" includes the
purchase of Class A shares in the Fund and of other funds sponsored by Smith
Barney that are offered with a sales charge listed under "Exchange Privilege".
A person eligible for a volume discount includes an individual; members of a
family unit comprising a husband, wife and minor children; a trustee or other
fiduciary purchasing for a single fiduciary account including pension, profit-
sharing and other employee benefit trusts qualified under Section 401(a) of the
Code, or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction for
qualified and nonqualified accounts and transmitted by a common employer enti-
ty. Employer entity for payroll deduction accounts may include trade and craft
associations and any other similar organizations.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13 month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds that are
offered with a sales charge listed under "Exchange Privilege" over a 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 com-
pute 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
22
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED) DATE
sales charge applicable to the total amount of the investment goal. If the
goal is not achieved within the period, the investor must pay the difference
between the sale charges applicable to the purchases made and the charges pre-
viously paid, or an appropriate number of escrowed shares will be redeemed.
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; and (b)
Class A shares, which when combined with Class A shares offered with a sales
charge currently held by an investor, equal or exceed $500,000 in the
aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Fund assets; (b) reinvestment of dividends or capital gains
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
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 pur-
chase 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.
23
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- --------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There will also be converted at that time such propor-
tion of Class B Dividend Shares owned by the shareholder as the total number of
his or her Class B shares converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder.
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 gains distribu-
tions 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 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 PFS.
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 addi-
tional 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.
24
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Redemption of Shares-Automatic Cash Withdrawal Plan"); (c) re-
demption of shares within 12 months following the death or disability of the
shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemption 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 PFS of the share-
holder's status or holdings, as the case may be.
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 fol-
lowing 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
and Class B 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.
FUND NAME
. 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
. Smith Barney Appreciation Fund Inc.
. Smith Barney Growth Opportunity Fund
*
. Smith Barney Money Funds, Inc.--Cash Portfolio
**
. Smith Barney Exchange Reserve Fund
* Available for exchange with Class A shares of the Fund
** Available for exchange with Class B shares of the Fund
25
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
EXCHANGE PRIVILEGE (CONTINUED) DATE
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold without
a sales charge or with a maximum sales charge of less than the maximum charged
by other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of their shares for Class A shares of a
fund sold with a higher sales charge. The "sales charge differential" is lim-
ited 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 pur-
poses of the exchange privilege, shares obtained through automatic reinvest-
ment of dividends and capital gains distributions, are treated as having paid
the same sales charges applicable to the shares on which the dividends or dis-
tributions were paid; however, 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 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.
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. The Manager
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, the
Manager will notify PFS that the Fund and PFS may, at its discretion, decide
to limit additional purchases and/or exchanges by a shareholder. Upon such a
determination by the Fund, PFS will provide notice in writing or by telephone
to the shareholder at least 15 days prior to suspending the exchange privilege
and during the 15 day period the shareholder will be required to (a) redeem
his or her shares in the Fund or (b) remain invested in the Fund or exchange
into any of the Smith Barney Mutual Funds listed under "Exchange Privilege",
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
26
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
EXCHANGE PRIVILEGE (CONTINUED)
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 registra-
tion 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
Shareholders may redeem for cash some or all of their shares of the Fund at
any time by sending a written request in proper form directly to the Sub-
Transfer Agent, PFS Shareholder Services, at 3100 Breckinridge Blvd., Bldg.
200, Duluth, Georgia 30199-0062. If you should have any questions concerning
how to redeem your account after reviewing the information below, please con-
tact the Sub-Transfer Agent at (800) 544-5445, Spanish-speaking representa-
tives (800) 544-7278 or TDD Line for the Hearing Impaired (800) 824-1721.
As described under "Purchase of Shares", redemptions of Class B shares are
subject to a contingent deferred sales charge.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account regis-
tration. If the proceeds of the redemption exceed $50,000, or if the proceeds
are not to be paid to the record owner(s) at the record address, if the share-
holder(s) has had an address change in the past 45 days, or if the sharehold-
er(s) is a corporation, sole proprietor, partnership, trust or fiduciary, sig-
natures must be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a savings and loan association; or
a federal savings bank.
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accompany the redemption request. Additional documentary evidence of authority
is
27
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
REDEMPTION OF SHARES (CONTINUED) DATE
also required by the Sub-Transfer Agent in the event redemption is requested by
a corporation, partnership, trust, fiduciary, executor or administrator. Addi-
tionally, if a shareholder requests a redemption from a Retirement Plan account
(IRA, SEP or 403(b)(7)), such request must state whether or not federal income
tax is to be withheld from the proceeds of the redemption check.
A shareholder may utilize the Sub-Transfer Agent's FAX to redeem their
account as long as a signature guarantee or other documentary evidence is not
required. Redemption requests should be properly signed by all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-2374. Facsimile
redemptions may not be available if the shareholder cannot reach the Sub-
Transfer Agent by FAX, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure described above. Facsimile redemptions received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day
will be processed at the net-asset value per share determined that day.
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed will be made by
check mailed within three days after acceptance by the Sub-Transfer Agent of
the request and any other necessary documents in proper order. Such payment may
be postponed or the right of redemption suspended as provided by the rules of
the SEC. If the shares to be redeemed have been recently purchased by check or
draft, the Sub-Transfer Agent may hold the payment of the proceeds until the
purchase check or draft has cleared, usually a period of up to 15 days. Any
taxable gain or loss will be recognized by the shareholder upon redemption of
shares.
After following the above-stated redemption guidelines, a shareholder(s) may
elect to have the redemption proceeds wire-transferred directly to the share-
holder's bank account of record (defined as a currently established pre-autho-
rized draft on the shareholder's account with no changes within the previous 45
days), as long as the bank account is registered in the same name(s) as the
account with the Fund. If the proceeds are not to be wired to the bank account
of record, or mailed to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the Sub-
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinar-
ily be credited to your bank account by your bank within 48 to 72 hours.
28
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retire-
ment plan accounts are eligible for automatic cash withdrawal plans only where
the shareholder is eligible to receive qualified distributions and has an
account value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. For further information regarding the automatic
cash withdrawal plan, shareholders should contact the Sub-Transfer Agent.
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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30 day "yield" for each Class
of shares. The yield of a Class refers to the income generated by an invest-
ment in such Class over the 30 day period identified in the advertisement, and
is computed by dividing the net investment income per share earned by the
Class during the period by the net asset value per share on the last day of
the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one year period and is compounded semi-annual-
ly. The annualized income is then shown as a percentage of the net asset val-
ue.
29
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
PERFORMANCE (CONTINUED)
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 and
Class B 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 specific period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gains distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the Securi-
ties and Exchange Commission, 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 portfo-
lio 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 perfor-
mance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
The Fund may from time to time illustrate the benefits of tax-deferral by
comparing taxable investments to investments made through tax-deferred retire-
ment plans and the Fund may illustrate in graph or chart form, or otherwise,
the benefits of the Systematic Investment Plan by comparing investment made
pursuant to a systematic investment plan to investments made in a rising mar-
ket.
30
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments between the Company and the Fund and companies that furnish services to
the Fund, including agreements with its distributor, investment adviser, cus-
todian and transfer agent. The day-to-day operations of the Fund are delegated
to the Fund's investment manager. The Statement of Additional Information con-
tains general and background information regarding each Director of the Fund
and executive officer of the Company.
INVESTMENT ADVISER
The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. The Manager (through its predecessors
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. The Manager renders investment advice to
investment companies that had aggregate assets under management as of January
31, 1996 in excess of $74 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
the Manager 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 portfo-
lio managers and securities analysts who provide research services to the
Fund. Under an investment advisory agreement, the Fund pays the Manager a
monthly fee at the annual rate of 0.45% of the value of the Fund's average
daily net assets up to $500 million and 0.42% of the value of average daily
net assets thereafter. For the fiscal year ended December 31, 1995, the Man-
ager was paid investment advisory fees equal to 0.45% of the value of the
Fund's average daily net assets.
PORTFOLIO MANAGEMENT
George E. Mueller, Jr., Managing Director of the Manager, has served as the
Investment Officer of the Fund since January 1, 1985, and manages the day-to-
day operations of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from the Sub-Trans
31
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
MANAGEMENT OF THE FUND (CONTINUED)
fer Agent or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration. For administration services rendered, the Fund
paid an administration fee at the annual rate of 0.20% of the value of the
Fund's average daily net assets.
DISTRIBUTOR
PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30199-0062.
PFS distributes shares of the Fund as principal underwriter and as such con-
ducts a continuous offering pursuant to a "best efforts" arrangement requiring
PFS 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"), PFS is paid an annual service fee with respect to
Class A and Class B shares of the Fund at the annual rate of 0.25% of the
average daily net assets of the respective Class. PFS is also paid an annual
distribution fee with respect to Class B shares at the annual rate of 0.50%,
of the average daily net assets attributable to that Class. 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
paid to PFS which, in turn pays PFS Investments to pay its Investments Repre-
sentatives for servicing shareholder accounts and, in the case of Class B
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
Investment Representatives 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 PFS Investments associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.
The payments to PFS Investments Representatives for selling shares of a
Class include a commission or fee paid by the investor or PFS at the time of
sale and a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Investments Representatives may
receive different levels of compensation for selling different Classes of
shares.
32
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
DISTRIBUTOR (CONTINUED)
PFS Investments may be deemed to be an underwriter for purposes of the Secu-
rities Act of 1933, as amended. From time to time, PFS or its affiliates may
also pay for certain non-cash sales incentives provided to PFS Investments Rep-
resentatives. Such incentives do not have any effect on the net amount invest-
ed. In addition to the reallowances from the applicable public offering price
described above, PFS may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other compensa-
tion to PFS Investments Representatives that sell shares of the Fund.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by PFS and the payments may
exceed distribution expenses actually incurred. The Company's Board of Direc-
tors will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so will consider all relevant factors, including
expenses borne by PFS, amounts received under the Plan and proceeds of the
CDSC.
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 to investors purchasing through PFS shares of common stock currently
classified into two Classes, A and B, with a par value of $.001 per share. Each
Class represents an identical interest in the Fund's investment portfolio. As a
result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the distribution and/or service
fees borne by each Class pursuant to the Plan; (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, National Association, is located at 17th and Chestnut Streets,
Philadelphia, PA 10103 and serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc. is located at Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Company's transfer agent.
PFS Shareholder Services is located at 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0062 and serves as the Fund's Sub-Transfer Agent.
33
<PAGE>
SMITH BARNEY
Investment Grade Bond Fund
ADDITIONAL INFORMATION
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 out-
standing 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 its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having multi-
ple 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 the Sub-
Transfer Agent.
34
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney
Investment
Grade Bond
Fund
3100 Breckinridge Blvd, Bldg 200
Duluth, Georgia 30199-0062
FDXXXX XX
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Managed
Growth
Fund
APRIL 29, 1996
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS APRIL 29, 1996
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The primary investment objective of the Smith Barney Managed Growth Fund (the
"Fund") is long term growth of capital.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Investment Funds Inc. (the
"Company"). The Fund is an open-end, management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Company
and the Fund, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and
retain it for future reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated April 29, 1996, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing a Smith Barney Financial Consultant. The Statement of Additional Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney
Managed Growth Fund
TABLE OF CONTENTS
PROSPECTUS SUMMARY 3
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- --------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 11
- --------------------------------------------------
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS 11
- --------------------------------------------------
VALUATION OF SHARES 16
- --------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 17
- --------------------------------------------------
PURCHASE OF SHARES 19
- --------------------------------------------------
EXCHANGE PRIVILEGE 30
- --------------------------------------------------
REDEMPTION OF SHARES 34
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 37
- --------------------------------------------------
PERFORMANCE 37
- --------------------------------------------------
MANAGEMENT OF THE FUND 38
- --------------------------------------------------
DISTRIBUTOR 39
- --------------------------------------------------
ADDITIONAL INFORMATION 40
- --------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company 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
Managed Growth 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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company whose investment objective is long term growth of capital. 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 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 pur-
suant 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 initial 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. The CDSC may be waived for certain redemp-
tions. 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.
<PAGE>
Smith Barney
Managed Growth 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 dis-
tributions ("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 ini-
tial 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 ben-
eficial to an investor depends on the amount and intended holding period of his
or her investment. Shareholders who are planning to establish a program of reg-
ular investment may wish to consider Class A shares; as the investment accumu-
lates, 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 shares 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 par-
tially or wholly offset the higher annual expenses of these Classes. Because
the Fund's future return cannot be predicted, however, there can be no assur-
ance that this would be the case.
4
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS SUMMARY (CONTINUED)
Finally investors should consider the effect of the CDSC period and any con-
version 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 distribu-
tion 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 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 spon-
sored 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 eli-
gible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
5
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS SUMMARY (CONTINUED)
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 spon-
sors 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 (collec-
tively, the "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 Shareholder 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 Retire-
ment 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 invest-
ment requirement for all Classes is $25. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes through the Systematic Investment Plan
described below is $50. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $50. See "Pur-
chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
6
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS SUMMARY (CONTINUED)
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advisory
and management services to investment companies affiliated with Smith Barney.
SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged, through its subsidiar-
ies principally in four business segments: Investment Services, Consumer
Finance Services, Life Insurance Services and Property & Casualty Insurance
Services. SBMFM also serves as the Fund's administrator. See "Management of
the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds. Certain
exchanges may be subject to a sales charge differential. See "Exchange Privi-
lege."
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 distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution 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 Fund invests principally in common
stocks. The prices of common stocks and other securities fluctuate and, there-
fore, the value of an investment in the Fund will vary based upon the Fund's
investment performance. Any income from these investments will be incidental
to the goal of capital appreciation. The Fund may use management techniques
and strategies involving options, futures contracts and options on futures
(which are sometimes referred to as "derivatives"). The utilization of these
techniques may involve greater than ordinary investment risks and the likeli-
hood of more volatile price fluctuation. See "Investment Objective and Manage-
ment Policies."
7
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, The
Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None* 5.00% 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of offering price)
Management Fees 0.85% 0.85% 0.85% 0.85%
12b-1 Fees** 0.25% 1.00% 1.00% None
Other Expenses*** 0.09% 0.09% 0.06% 0.09%
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.19% 1.94% 1.91% 0.94%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the aggregate, will be made at net asset value with no sales charge, but
will be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** "Other Expenses" for Class Y shares 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 on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. Smith Barney also receives with respect to Class B shares and
Class C shares, an annual 12b-1 fee of 1.00% of the value of average daily net
assets of that Class, consisting of a 0.25% service fee and a 0.75% distribu-
tion fee. "Other expenses" in the above table include fees for
8
<PAGE>
Smith Barney
Managed Growth Fund
PROSPECTUS SUMMARY (CONTINUED)
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."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A................................. $62 $86 $112 $187
Class B................................. $70 $91 $115 $207
Class C................................. $29 $60 $103 $223
Class Y................................. $10 $30 $ 52 $115
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. $62 $86 $112 $187
Class B................................. $20 $61 $105 $207
Class C................................. $19 $60 $103 $223
Class Y................................. $10 $30 $ 52 $115
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN ABOVE.
9
<PAGE>
Smith Barney
Managed Growth Fund
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1995 has been
audited in conjunction with the annual audits of the financial statement of the
Fund by KPMG Peat Marwick LLP, independent auditors. The 1995 financial state-
ments and the independent auditors' report thereon appear in the December 31,
1995 Annual Report to Shareholders. No information is presented for Class Y
shares, because no Class Y shares were outstanding for the period shown.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
CLASS A(1) CLASS B(1) CLASS C(1)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.00 $12.00 $12.00
- ----------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.16 0.11 0.11
Net realized and unrealized gain 0.02 0.02 0.03
- ----------------------------------------------------------------------
Total Income From Operations 0.18 0.13 0.14
- ----------------------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income (0.15) (0.11) (0.11)
- ----------------------------------------------------------------------
Total Distributions (0.15) (0.11) (0.11)
- ----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.03 $12.02 $12.03
- ----------------------------------------------------------------------
TOTAL RETURN++ 1.53% 1.16% 1.16%
- ----------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $160,487 $300,000 $42,530
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.19% 1.94% 1.91%
Net investment income 2.74 1.99 2.02
- ----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 6% 6% 6%
- ----------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06 $0.06
- ----------------------------------------------------------------------
</TABLE>
(1) For the period from June 30, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The investment objective of the Fund is long term growth of capital. There
can be no assurance that the investment objective of the Fund will be
achieved. The Fund's investment objective may be changed only by the "vote of
a majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
The Fund attempts to achieve its objective by investing primarily in common
stock 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. Although under normal circumstances the Fund's portfolio
will primarily consist of these securities, the Fund may also invest in pre-
ferred stocks and warrants when SBMFM perceives an opportunity for capital
growth from such securities. The Fund may, from time to time enter into
futures contracts, write call options and purchase put options (which are
sometimes referred to as "derivatives"). A derivative is a financial instru-
ment whose performance is derived, at least in part, from the performance of
an underlying asset. The Fund will not invest more than 10% of its assets in
derivatives. The Fund may also invest in repurchase agreements, lend its port-
folio securities and invest in real estate investment trusts and foreign secu-
rities. Additionally, the Fund may, subject to the limitations set forth in
the 1940 Act, invest in the securities of other investment companies.
SBMFM's investment decisions with respect to the Fund's portfolio are based
upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, the
multiple of earnings, private market value and the ratio of market capitaliza-
tion to sales. These factors are not applied formulaically, as SBMFM examines
each security separately.
Although the Fund's assets will be invested primarily in equity securities,
government securities money market instruments may be held and repurchase
agreements may be entered into for temporary defensive purposes and so that
the Fund may receive a return on its otherwise uninvested cash. When SBMFM
invests in such securities, investment income will increase and may constitute
a larger portion of the return on the Fund.
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
Warrants; Convertible Securities. A warrant is a security that gives the
holder the right, but not the obligation, to subscribe for newly created secu-
rities
11
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
of the issuer or a related company at a fixed price either at a certain date
or during a set period. A convertible security is a security that may be con-
verted either at a stated price or rate within a specified period of time into
a specified number of shares of common stock. In investing in convertible
securities, the Fund seeks the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible.
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 "premi-
um") 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 secu-
rities. Accordingly, whenever the Fund writes a call option on its securities,
it will continue to own or have the present right to acquire the underlying
security for as long 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 hav-
ing 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 under-
lying security (thereby permitting its sale or the writing of a new option on
the secu-
12
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
rity prior to the outstanding option's expiration). To effect a closing pur-
chase 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 transactions 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 exer-
cise 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"; i.e. the closing level of
the index is higher than the exercise price of the option. 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 gener-
ally rather than price movements in the individual stocks.
The effectiveness of purchasing and writing puts and calls on stock index
options depends to a large extent on the ability of the SBMFM to predict the
price movement of the stock index selected. Therefore, whether the Fund real-
izes 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. Addi-
tionally, because exercises of index options are settled in cash, a call
writer such as the Fund cannot determine the amount of the settlement obliga-
tions 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
13
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
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 posi-
tion it holds.
Futures Contracts and Options on Futures Contracts. A futures contract pro-
vides for the future sale by one party and the purchase by the other party of
a certain amount of a specified security at a specified price, date, time and
place. The Fund may enter into futures contracts to sell securities when SBMFM
believes that the value of the Fund's securities will decrease. An option on a
futures contract, as contrasted with the direct investment in a futures con-
tract, gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time prior to the expiration date of the option. A call option gives the pur-
chaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying
securities. A put option gives a purchaser the right to sell and obliges the
writer to buy the underlying contract. The Fund may enter into futures con-
tracts to purchase securities when SBMFM anticipates purchasing the underlying
securities and believes that prices will rise before the purchases will be
made. When the Fund enters into a futures contract to purchase an underlying
security, an amount of cash, government securities or other high grade debt
securities, equal to the market value of the contract, will be deposited in a
segregated account with the Fund's custodian to collateralize the position,
thereby insuring that the use of the contract is unleveraged. The Fund will
not enter into futures contracts for speculation and will only enter into
futures contracts that are traded on a U.S. exchange or board of trade.
Lending Securities. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations. These loans, if and when
made, may not exceed 33 1/3% of the Fund's assets taken at value. The Fund's
loans of securities will be collateralized by cash, letters of credit or gov-
ernment securities that are maintained at all times in a segregated account
with the Fund's custodian in an amount at least equal to the current market
value of the loaned securities. By lending its portfolio securities, the Fund
will seek to generate income by continuing to receive interest on the loaned
securities, by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when government
securities are used as collateral. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of
14
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
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 considera-
tion to be earned from such loans would justify the risk.
Foreign Securities. The Fund may invest up to 10% of its net assets in secu-
rities of foreign issuers. Investing in foreign securities involves certain
risks, including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future political or economic developments and the
possible imposition of restrictions or prohibitions on the repatriation of for-
eign currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers, and, typically, the lack
of uniform accounting, auditing and financial reporting standards or other reg-
ulatory practices and requirements comparable to those applicable to domestic
companies. Moreover, securities of many foreign companies may be less liquid
and their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, confiscatory taxation and limitations on the
use or removal of funds or other assets of the Fund, including the withholding
of dividends.
The Fund may invest in securities commonly known as American Depository
Receipts ("ADR's") of foreign issuers which have certain risks, including trad-
ing for a lower price, having less liquidity than their underlying securities
and risks relating to the issuing bank or trust company. ADR's can be sponsored
by the issuing bank or trust company or unsponsored. Holders of unsponsored
ADR's have a greater risk that receipt of corporate information will be
untimely and incomplete and costs may be higher.
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, as amended (the "Securities Act"), OTC
options and securities that are otherwise considered illiquid as a result of
market or other factors. Although it may invest up to 15% of its assets in such
securities, the Fund does not currently anticipate investing more than 5% on
its assets in restricted or illiquid securities. The Fund may invest in securi-
ties eligible for resale under Rule 144A of the Securities Act ("Rule 144A
securities"). The Board of Directors of the Fund may determine that specific
Rule 144A securities held by the Fund may be deemed liquid. Nevertheless, due
to changing market or other factors, Rule 144A securities may be subject to a
greater possibility of becoming illiquid than registered securities.
15
<PAGE>
Smith Barney
Managed Growth Fund
INVESTMENT OBJECTIVES 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 pro-
vide prompt and reliable execution at favorable prices and reasonable commis-
sion 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. In selecting a broker, including Smith Barney, for a trans-
action, the primary consideration is prompt and effective execution of orders
at the most favorable prices. Subject to that primary consideration, dealers
may be selected for research, statistical or other services to enable SBMFM to
supplement its own research and analysis.
It is anticipated that the annual portfolio turnover rate of the Fund normally
will be less than 100%. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal 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.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value, or, in the
absence of a market value with respect to any securities, at fair value. Secu-
rities 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 assis-
tance of a pricing service and are generally valued at the preceding closing
values of such
16
<PAGE>
Smith Barney
Managed Growth Fund
VALUATION OF SHARES (CONTINUED)
securities on their respective exchange, except that when an occurrence subse-
quent 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 considera-
tion 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 valua-
tion. Any assets or liabilities initially expressed in terms of foreign curren-
cies 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 ar 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'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 dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4.00% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed ordi-
nary income or capital gains and expects to pay any other dividends and distri-
butions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be lower
than the per share dividends on Class A and Class Y shares principally as a
result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class C and Class Y shares.
17
<PAGE>
Smith Barney
Managed Growth Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code. To qualify, the Fund must first meet cer-
tain requirements, including the distribution of at least 90% of its invest-
ment 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).
Distributions of any investment company taxable income are taxable to share-
holders 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 gain dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date
in such a month will be deemed to have been received by shareholders on Decem-
ber 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 capi-
tal 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 gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends 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.
18
<PAGE>
Smith Barney
Managed Growth Fund
DATE
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 redemp-
tions. 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 offers a fifth class of shares:
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 this criteria who
are interested in acquiring Class Z shares should consult a Smith Barney Finan-
cial 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, includ-
ing qualified retirement plans and certain other institutional investors, may
purchase shares directly from the Fund 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 mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares
may open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial invest-
ment requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $50. There are no minimum
19
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
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 val-
ue, 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 the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or Intro-
ducing 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 preau-
thorized 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 Bar-
ney 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.
20
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 - and over * * *
- ---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares offered with a sales charge held in funds sponsored by
Smith Barney that are offered with a sales charge listed under "Exchange Privi-
lege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales 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
21
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
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 spon-
sored by the Financial Consultant's prior employer, (ii) was sold to the cli-
ent 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 in 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 reinvest-
ment is made within 60 calendar days of the redemption; and (e) accounts man-
aged 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 aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the
22
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
same employer purchasing as a group, provided each participant makes the mini-
mum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for such reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer- or partnership-
sanctioned plan 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 pay-
roll deductions, IRAs or investments pursuant to retirement plans under Sec-
tions 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 quali-
fied group may also purchase Class A shares at the reduced sales charge appli-
cable 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 pre-
viously purchased and 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 dis-
count 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 suffi-
cient information at the time of purchase to permit verification that the pur-
chase 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
the investments over a 13-month period, provided that the investor refers
23
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
to such Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of the
Smith Barney Mutual Funds offered with a sales charge over the 13-month period
based on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please Con-
tact 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 pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject 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%. 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
24
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case
of purchases by Participating Plans, as described below. See "Purchase of
Shares--Smith Barney 401(k) Program:"
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth 0.00
Seventh 0.00
Eighth 0.00
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fee. There will also be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. In addition, a certain portion of Class B
Dividend Shares will be
25
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
converted at that time. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Fund will be offered the opportunity to exchange all such Class B shares
for Class A shares of the Fund four years after the date on which those shares
were deemed to have been purchased. Holders of such Class B shares will be
notified of the pending exchange in writing approximately 30 days before the
fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary--Alternative Purchase Arrangements--Class B
Shares Conversion Feature."
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 distribu-
tions and finally of other shares held by the shareholders 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 Smith Barney Mutual
Funds, and Fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on 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 addi-
tional 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
26
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
of the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawal in amounts equal to or less than 2.00% per month of the
value of the shareholders shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemption of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemption 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 opera-
tion of retirement plans under Section 401(a) of the Code. To the extent appli-
cable, 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 dif-
ferent 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 invest-
ors, 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
27
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds.
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 Bar-
ney Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Pro-
gram are subject to a CDSC of 3.00% of redemption proceeds, if the Participat-
ing 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 Bar-
ney 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 anni-
versary 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 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. Each 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 following March. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire Class C
shares of the Fund but instead
28
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
may acquire Class A shares of the Fund. Class C shares not converted will con-
tinue 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 pur-
chases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gains
distributions, plus (a) with respect to Class A and Class C shares, the cur-
rent 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 pay-
ments 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 Class B shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions 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 termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee
in the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from FDISG. For fur
29
<PAGE>
Smith Barney
Managed Growth Fund
PURCHASE OF SHARES (CONTINUED) DATE
ther 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.
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 Natural Resources Fund Inc.
Smith Barney Special Equities Fund
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
30
<PAGE>
Smith Barney
Managed Growth Fund
EXCHANGE PRIVILEGE (CONTINUED) DATE
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
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
31
<PAGE>
Smith Barney
Managed Growth Fund
EXCHANGE PRIVILEGE (CONTINUED) DATE
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio.
- -------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this Fund.
***Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) 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 charged
by other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of their shares for Class A shares of a
fund sold with a higher sales charge. The "sales charge differential" is lim-
ited 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 pur-
poses of the exchange privilege, shares obtained through automatic reinvest-
ment of dividends and capital gains distributions, are treated as having paid
the same sales charges applicable to the shares on which the dividends or dis-
tributions 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 the
shares, any shares obtained through automatic reinvestment will be subject to
a sales charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Fund on July 15,
1994) wishes to exchange all or a portion of his or her shares into any of the
funds imposing a higher CDSC than that imposed by the Fund, the exchanged
32
<PAGE>
Smith Barney
Managed Growth Fund
EXCHANGE PRIVILEGE (CONTINUED) DATE
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 the shareholder. Upon such a determi-
nation, 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 listed above, which position the
shareholder would be expected to maintain for a significant period of time.
All relevant factors will be considered in determining what constitutes an
abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program". Exchanges will
be processed at the net asset value next determined, 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 support-
ing 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.
33
<PAGE>
Smith Barney
Managed Growth Fund
REDEMPTION OF SHARES DATE
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 redemp-
tion proceeds will be remitted on or before the third day following receipt of
proper tender, except on days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended ("1940 Act"), in extraor-
dinary 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 bene-
fit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or
more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Managed Growth FundClass A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
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 regis-
tered.
34
<PAGE>
Smith Barney
Managed Growth Fund
REDEMPTION OF SHARES (CONTINUED) DATE
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 signa-
ture appearing on a 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 signa-
ture guarantee unless more than one such redemption request is made in any 10-
day period. Redemption proceeds will be mailed to an investor's address of rec-
ord. 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 periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. 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 signature guarantee
that will be provided by FDISG upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account application
35
<PAGE>
Smith Barney
Managed Growth Fund
REDEMPTION OF SHARES (CONTINUED) DATE
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 sharehold-
er'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 share-
holder'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 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
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 instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
36
<PAGE>
Smith Barney
Managed Growth Fund
REDEMPTION OF SHARES (CONTINUED) DATE
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 follow-
ing 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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
PERFORMANCE
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on 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 invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeem-
able 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
37
<PAGE>
Smith Barney
Managed Growth Fund
PERFORMANCE DATE
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 calcu-
lating 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 infor-
mation in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other financial
publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the 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, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment manager. The Statement of Additional
Information contains background information regarding each Director of the
Fund and executive officer of the Company.
SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser and manages the day-to-day operations of the
Fund pursuant to a management agreement entered into by the Company, on behalf
of the Fund. SBMFM renders investment advice to investment companies which had
aggregate assets under management as of January 31, 1996, in excess of $74
billion.
Subject to the supervision and direction of the Company's Board of Direc-
tors, 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 portfo-
lio 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 0.85% of the value of its average daily net
38
<PAGE>
Smith Barney
Managed Growth Fund
MANAGEMENT OF THE FUND (CONTINUED) DATE
assets. Although this fee is higher than that paid by most investment compa-
nies, the Fund's management has determined that it is comparable to the fee
charged by other investment advisers of investment companies that have similar
investment objectives and policies.
PORTFOLIO MANAGEMENT
Doug Johnson, a Director of the Mutual Fund Division of Smith Barney, will
manage the day to day operations of the Fund's investment portfolio. Prior to
joining Smith Barney, Mr. Johnson was a portfolio manager with Safeco Asset
Management, where he co-managed the Safeco Equity Fund since 1984.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended December 31, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the annual rate of 0.75% of the average daily net assets attribut-
able 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 sub-
ject to distribution fees. The fees are used by Smith Barney to pay its Finan-
cial 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
39
<PAGE>
Smith Barney
Managed Growth Fund
DATE
DISTRIBUTOR (CONTINUED)
Financial Consultants and other persons who provide support services in con-
nection 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 con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the pay-
ments 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 fac-
tors, 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 represents an identi-
cal interest in the Fund's investment portfolio. As a result, the Classes have
the same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the effect of the respective sales charges for
each Class; (c) the distribution and/or service fees borne by each Class pur-
suant to the Plan; (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 conflicts
exists and, if so, take appropriate action.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as custodian of the Fund's investments.
40
<PAGE>
Smith Barney
Managed Growth Fund
DATE
ADDITIONAL INFORMATION (CONTINUED)
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 pur-
pose upon written request of shareholders holding at least 10% of the
Company's outstanding shares and the Company will assist shareholders in call-
ing 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 its shareholders a semi-annual report and an audited annual
report, which include a list of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Company plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold 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 mul-
tiple 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 Consultant or FDISG.
41
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group[ART]
SMITH BARNEY
MANAGED
GROWTH
FUND
388 Greenwich Street
New York, New York 10013
FD 0899 4/96
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Managed
Growth
Fund
Class Z Shares Only
APRIL 29, 1996
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
PROSPECTUS APRIL 29, 1996
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The primary investment objective of the Smith Barney Managed Growth Fund (the
"Fund") will be long term growth of capital.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Investment Funds Inc. (the
"Company"). The Fund is an open-end, diversified management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Company
and the Fund, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this Pro-
spectus carefully and retain it for future reference.
The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of Smith
Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans").
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated April 29, 1996, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing a Smith Barney Financial Consultant. The Statement of Additional Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 10
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 11
- -------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 13
- -------------------------------------------------
EXCHANGE PRIVILEGE 13
- -------------------------------------------------
PERFORMANCE 15
- -------------------------------------------------
MANAGEMENT OF THE FUND 15
- -------------------------------------------------
ADDITIONAL INFORMATION 17
- -------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund
or the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- -------------------------------------------------------------------------------
2
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
THE FUND'S EXPENSES DATE
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.85%
Other expenses 0.05
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES........................................... 0.90%
- --------------------------------------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "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 and Redemption of Shares" and "Manage-
ment of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) a 5.00% annual return
and (2) redemption at the end of each time
period: $9 $29 $50 $111
</TABLE>
- --------------------------------------------------------------------------------
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1995 has been
audited in conjunction with the annual audits of the financial statements of
Smith Barney Investment Funds, Inc. by KPMG Peat Marwick LLP, independent audi-
tors. The 1995 financial statements and the independent auditors' report
thereon appear in the December 31, 1995 Annual Report to Shareholders.
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
CLASS Z(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.83
- ---------------------------------------------------------------------
Income From Operations:
Net investment income 0.04
Net realized and unrealized gain 0.32
- ---------------------------------------------------------------------
Total Income From Operations 0.36
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.16)
- ---------------------------------------------------------------------
Total Distributions (0.16)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.03
- ---------------------------------------------------------------------
TOTAL RETURN 3.06%++
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $10,040
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.90%+
Net investment income 2.30+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 6%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON EQUITY SECURITY TRANSACTIONS $ 0.06
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from October 2, 1995 (inception date) to December 31, 1995.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
4
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is long term growth of capital. There
can be no assurance that the investment objective of the Fund will be
achieved. The Fund's investment objective may be changed only by the "vote of
a majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
The Fund attempts to achieve its objective by investing primarily in common
stock 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. Although under normal circumstances the Fund's portfolio
will primarily consist of these securities, the Fund may also invest in pre-
ferred stocks and warrants when Smith Barney Mutual Funds Management Inc.
("SBMFM"), the fund's investment adviser, perceives an opportunity for capital
growth from such securities. The Fund may, from time to time enter into
futures contracts, write call options and purchase put options (which are
sometimes referred to as "derivatives"). A derivative is a financial instru-
ment whose performance is derived, at least in part, from the performance of
an underlying asset. The Fund will not invest more than 10% of its assets in
derivatives. The Fund may also invest in repurchase agreements, lend its port-
folio securities and invest in real estate investment trusts and foreign secu-
rities. Additionally, the Fund may, subject to the limitations set forth in
the 1940 Act, invest in the securities of other investment companies.
SBMFM's investment decisions with respect to the Fund's portfolio are based
upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, the
multiple of earnings, private market value and the ratio of market capitaliza-
tion to sales. These factors are not applied formulaically, as SBMFM examines
each security separately.
Although the Fund's assets will be invested primarily in equity securities,
government securities money market instruments may be held and repurchase
agreements may be entered into for temporary defensive purposes and so that
the Fund may receive a return on its otherwise uninvested cash. When the SBMFM
invests in such securities, investment income will increase and may constitute
a larger portion of the return on the Fund.
5
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
Warrants; Convertible Securities. A warrant is a security that gives the
holder the right, but not the obligation, to subscribe for newly created secu-
rities of the issuer or a related company at a fixed price either at a certain
date or during a set period. A convertible security is a security that may be
converted either at a stated price or rate within a specified period of time
into a specified number of shares of common stock. In investing in convertible
securities, the Fund seeks the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible.
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 "premi-
um") 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 secu-
rities. Accordingly, whenever the Fund writes a call option on its securities,
it will continue to own or have the present right to acquire the underlying
security for as long 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 hav-
ing 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).
6
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or to unfreeze an under-
lying security (thereby permitting its sale or the writing of a new option on
the security prior to the outstanding option's expiration). To effect a clos-
ing purchase transaction, the Fund would purchase, prior to the holder's exer-
cise of an option that the Fund has written, an option of the same series as
that on which the Fund desires to terminate its obligation. The obligation of
the Fund under an option that it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an option as a
result of the transaction. There can be no assurances that the Fund will be
able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on domes-
tic 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 transactions 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 exer-
cise 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"; i.e. the closing level of
the index is higher than the exercise price of the option. 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 gener-
ally rather than price movements in the individual stocks.
The effectiveness of purchasing and writing puts and calls on stock index
options depends to a large extent on the ability of SBMFM to predict the price
movement of the stock index selected. Therefore, whether the Fund realizes a
gain or loss from the purchase of options on an index depends upon movements
in the level of stock prices in the stock market generally. Additionally,
because exercises of index options are settled in cash, a call writer such as
the Fund cannot determine the amount of the settlement obligations in advance
and
7
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
it cannot provide in advance for, or cover, its potential settlement obliga-
tions 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.
Futures Contracts and Options on Futures Contracts.A futures contract pro-
vides for the future sale by one party and the purchase by the other party of
a certain amount of a specified security at a specified price, date, time and
place. The Fund may enter into futures contracts to sell securities when SBMFM
believes that the value of the Fund's securities will decrease. An option on a
futures contract, as contrasted with the direct investment in a futures con-
tract, gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time prior to the expiration date of the option. A call option gives the pur-
chaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying
securities. A put option gives a purchaser the right to sell and obliges the
writer to buy the underlying contract. The Fund may enter into futures con-
tracts to purchase securities when SBMFM anticipates purchasing the underlying
securities and believes that prices will rise before the purchases will be
made. When the Fund enters into a futures contract to purchase an underlying
security, an amount of cash, government securities or other high grade debt
securities, equal to the market value of the contract, will be deposited in a
segregated account with the Fund's custodian to collateralize the position,
thereby insuring that the use of the contract is unleveraged. The Fund will
not enter into futures contracts for speculation and will only enter into
futures contracts that are traded on a U.S. exchange or board of trade.
Lending Securities.The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations. These loans, if and when
made, may not exceed 33 1/3% of the Fund's assets taken at value. The Fund's
loans of securities will be collateralized by cash, letters of credit or gov-
ernment securities that are maintained at all times in a segregated account
with the Fund's custodian in an amount at least equal to the current market
value of the loaned securities. By lending its portfolio securities, the Fund
will seek to generate income by continuing to receive interest on the loaned
securities, by investing the cash
8
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when government securities are used as collater-
al. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the collat-
eral 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.
Foreign Securities.The Fund may invest up to 10% of its net assets in securi-
ties of foreign issuers. Investing in foreign securities involves certain
risks, including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future political or economic developments and the
possible imposition of restrictions or prohibitions on the repatriation of for-
eign currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers, and, typically, the lack
of uniform accounting, auditing and financial reporting standards or other reg-
ulatory practices and requirements comparable to those applicable to domestic
companies. Moreover, securities of many foreign companies may be less liquid
and their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, confiscatory taxation and limitations on the
use or removal of funds or other assets of the Fund, including the withholding
of dividends.
The Fund may invest in securities commonly known as American Depository
Receipts ("ADR's") of foreign issuers which have certain risks, including trad-
ing for a lower price, having less liquidity than their underlying securities
and risks relating to the issuing bank or trust company. ADR's can be sponsored
by the issuing bank or trust company or unsponsored. Holders of unsponsored
ADR's have a greater risk that receipt of corporate information will be
untimely and incomplete and costs may be higher.
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 15% of its assets in such securities, the Fund does not currently
anticipate investing more than 5% on its assets in restricted or illiquid secu-
rities. The Fund may invest in securities eligible for resale under Rule 144A
of the Securi-
9
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ties Act ("Rule 144A securities"). The Board of Directors of the Fund may
determine that specific Rule 144A securities held by the Fund may be deemed
liquid. Nevertheless, due to changing market or other factors, Rule 144A secu-
rities may be subject to a greater possibility of becoming illiquid than regis-
tered securities.
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 pro-
vide prompt and reliable execution at favorable prices and reasonable commis-
sion 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. In selecting a broker for a transaction, including Smith
Barney, the primary consideration is prompt and effective execution of orders
at the most favorable prices. Subject to that primary consideration, dealers
may be selected for research, statistical or other services to enable SBMFM to
supplement its own research and analysis.
It is anticipated that the annual portfolio turnover rate of the Fund normally
will be less than 100%. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal 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.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value, or, in the
absence of a market value with respect to any securities, at fair value. Secu-
rities listed on an exchange are valued on the basis of the last sale prior to
the time
10
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
VALUATION OF SHARES (CONTINUED)
the valuation is made. If there has been no sale since the immediately previ-
ous 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 assis-
tance of a pricing service and are generally valued at the preceding closing
values of such securities on their respective exchange, except that when an
occurrence subsequent to the time a foreign security is valued is likely to
have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quota-
tions are not readily available are valued at fair value. Notwithstanding the
above, bonds and other fixed-income securities are valued by using market quo-
tations 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's policy is to distribute substantially all of its net 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 dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4.00% non-deductible excise tax on certain undis-
tributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 in each year of any undis-
tributed ordinary income or capital gains and expects to pay any other divi-
dends and distributions necessary to avoid the application of this tax.
11
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code. To qualify, the Fund must first meet cer-
tain requirements, including the distribution of at least 90% of its invest-
ment 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).
Distributions of any investment company taxable income are taxable to share-
holders 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 gain dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date
in such a month will be deemed to have been received by shareholders on Decem-
ber 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 capi-
tal assets in the shareholder's hands, and generally will be long-term or
short-term depending upon the shareholder's holding period for the shares. Any
loss realized by a shareholder on disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss
to the extent of any distributions of capital gains dividends received by the
shareholder with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from U.S. government securities may be exempt
from all state and local income taxes. Shareholders should consult their plan
documents and/or tax advisors for specific information on the tax consequences
of participating in a Qualified Plan.
12
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
PURCHASE AND REDEMPTION OF SHARES
Purchasers of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan. Purchases are effected at the net asset value next
determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the "settle-
ment date") after the trade date. Investors who make payment prior to the set-
tlement date may designate a temporary investment (such as a money market fund
of the Smith Barney Mutual Funds) for such payment until settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for period of time. There are no minimum investment requirements
for Class Z shares; however, the Fund reserves the right to vary this policy at
any time.
Purchase orders received by Smith Barney prior to the close of regular trad-
ing on the NYSE, currently 4:00 p.m., New York time, on any day that the Fund
calculates its net asset value, are priced according to the net asset value
determined on that day. See "Valuation of Shares."
Shareholders may redeem their shares on any day on which the Fund calculates
its net asset value. See "Valuation of Shares." Redemption requests received in
proper form prior to the close of regular trading on the NYSE are priced at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. Shareholders acquiring Class Z shares through a Qual-
ified Plan should consult the terms of their respective plans for redemption
provisions.
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their shares 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 shares may be made at any
time without payment of any exchange fee.
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Diversified Strategic Income Fund
13
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney High Income Fund
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
Smith Barney Utilities Fund
Smith Barney Special Equities Fund
Smith Barney World Funds, Inc. -- International Equity Portfolio
The exchange of shares of one fund for shares of another fund is generally
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize
a taxable gain or loss in connection with the exchange. Shareholders should
consult their plan prospectus and/or other governing documents regarding
exchanges. Generally, exchanges within such a plan are not treated as a tax-
able event.
Shareholders exercising the exchange privilege with any of the other funds
of the Smith Barney Mutual Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves the right to
reject any exchange request.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its sharehold-
ers. 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, the SBMFM will notify Smith Barney, and Smith Barney may, at its dis-
cretion, decide to limit additional purchases and/or exchanges by the share-
holder. Upon such a determination, Smith Barney will provide notice in writing
or by telephone to the shareholder at least 15 days prior to 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
listed above, which position the shareholder would be expected to maintain for
a significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges. The Fund
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
14
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
PERFORMANCE DATE
From time to time the Fund may include its total return, average annual total
return and current dividend return for Class Z shares in advertisements and/or
other types of sales literature. 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 divi-
dends and capital gain distributions on the reinvestment dates at prices calcu-
lated 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 sub-
tracting 100%. The standard average annual total return, as prescribed by the
SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for Class Z shares 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 may vary from time to time depending on market conditions, the compo-
sition 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 Class Z shares 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. The Fund will
include performance data for Class Z shares in any advertisement or information
including performance data of the Fund.
MANAGEMENT OF 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, custodian and transfer agent. The day-to-day operations of
15
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
MANAGEMENT OF THE FUND (CONTINUED) DATE
the Fund are delegated to the Fund's investment manager. The Statement of
Additional Information contains background information regarding each Director
of the Fund and executive officer of the Company.
SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser and manages the day-to-day operations of the
Fund pursuant to a management agreement entered into by the Company, on behalf
of the Fund. SBMFM renders investment advice to investment companies, individ-
ual, institutional and investment company clients which had aggregate assets
under management as of January 31, 1996, in excess of $74 billion.
Subject to the supervision and direction of the Company's Board of Direc-
tors, 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 portfo-
lio 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 0.85% of the value of its average daily net assets.
Although this fee is higher than that paid by most investment companies, the
Fund's management has determined that it is comparable to the fee charged by
other investment advisers of investment companies that have similar investment
objectives and policies.
PORTFOLIO MANAGEMENT
Doug Johnson, a Director of the Mutual Fund Division of Smith Barney, is
responsible for the management of the Fund's assets. Prior to joining Smith
Barney, Mr. Johnson was a portfolio manager with Safeco Asset Management,
where he co-managed the Safeco Equity Fund since 1984.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ending December 31, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
16
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
ADDITIONAL INFORMATION DATE
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 represents an identi-
cal interest in the Fund's investment portfolio. As a result, the Classes have
the same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the effect of the respective sales charges for
each Class; (c) the distribution and/or service fees borne by each Class pursu-
ant to the Plan; (d) the expenses allocable exclusively to each Class; (e) vot-
ing 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 conflicts exists and, if so,
take appropriate action.
PNC Bank is located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103 and serves as custodian of the Fund's investments.
FDISG is located at Exchange Place, Boston, Massachusetts 02109 and serves as
the Company's transfer agent.
The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's out-
standing 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 its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Company plans to consolidate the mailing of its
17
<PAGE>
Smith Barney
Managed Growth Fund--Class Z Shares
ADDITIONAL INFORMATION (CONTINUED) DATE
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 mul-
tiple 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 Consultant or FDISG.
18
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup[ART]
SMITH BARNEY
MANAGED
GROWTH
FUND
388 Greenwich Street
New York, New York 10013
FD 01010 4/96
<PAGE>
SMITH BARNEY INVESTMENT FUNDS INC.
Growth Opportunity Fund
PROSPECTUS APRIL 29, 1996
- --------------------------------------------------------------------------------
3100 Breckinridge Blvd., Bldg 200
Duluth, Georgia 30199-0062
(800) 544-5445
The Smith Barney Growth Opportunity Fund (the "Fund") seeks capital apprecia-
tion through investments in securities believed to have above average potential
for capital appreciation.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Investment Funds Inc. (the "Com-
pany"). The Fund is an open-end, management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Company and
the Fund, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated April 29, 1996, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing an Investments Representative of PFS Investments Inc. ("PFS Investments").
The Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this Pro-
spectus in its entirety.
PFS DISTRIBUTORS, 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.
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- --------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 10
- --------------------------------------------------
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS 11
- --------------------------------------------------
VALUATION OF SHARES 15
- --------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 16
- --------------------------------------------------
PURCHASE OF SHARES 17
- --------------------------------------------------
EXCHANGE PRIVILEGE 23
- --------------------------------------------------
REDEMPTION OF SHARES 25
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 27
- --------------------------------------------------
PERFORMANCE 27
- --------------------------------------------------
MANAGEMENT OF THE FUND 28
- --------------------------------------------------
DISTRIBUTOR 29
- --------------------------------------------------
ADDITIONAL INFORMATION 30
- --------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company 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
Growth Opportunity 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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, management investment company
whose investment objective is to seek capital appreciation through investments
in securities believed to have above average potential for capital
appreciation. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers two classes of shares
("Classes") to investors purchasing through PFS Investments Representatives
designed to provide them with the flexibility of selecting an investment best
suited to their needs--the two classes of shares available are: Class A shares
and Class B shares. See "Purchase of Shares" and "Redemption of Shares." In
addition to Class A and Class B shares, the Fund offers Class C and Class Y
shares to investors purchasing through Smith Barney Inc. ("Smith Barney") a
distributor of the Fund. Those shares have different sales charges and other
expenses than Class A and Class B shares which may affect performance.
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 initial 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 bear an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the 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
distri-
3
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PROSPECTUS SUMMARY (CONTINUED)
butions ("Class B Dividend Shares") will be converted at that time. See "Pur-
chase of Shares--Deferred Sales Charge Alternatives."
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 ben-
eficial 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 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 this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
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 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 spon-
sored by Smith Barney listed under "Exchange Privilege." Class A share pur-
chases 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 shares, purchasers eligible to purchase Class A shares at net
asset value or at a reduced sales charge should consider doing so.
PFS Investments Representatives may receive different compensation for selling
each Class of shares. Investors should understand that the purpose of the CDSC
on the Class B shares is the same as that of the initial sales charge on the
Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
4
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PROSPECTUS SUMMARY (CONTINUED)
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, PFS
Distributors, Inc. ("PFS"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class B 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. The initial investment amount will be waived for accounts establishing a
Systematic Investment Plan. Subsequent investments of at least $50 may be made
for both Classes. For participants in retirement plans qualified under Section
403(b)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), the
minimum initial and subsequent investment requirement for both Classes is $25.
The minimum initial and subsequent investment requirement for both Classes
through the Systematic Investment Plan described below is $50. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser 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 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 differential See "Exchange Privilege."
5
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from PFS Shareholder Services (the "Sub-Transfer Agent"). 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."
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 Fund invests principally in common
stocks. The prices of common stocks and other securities fluctuate and,
therefore, the value of an investment in the Fund will vary based upon the
Fund's investment performance. Any income from these investments will be
incidental to the goal of capital appreciation. The Fund may use management
techniques and strategies involving options, futures contracts and options on
futures (which are sometimes referred to as "derivatives"). The utilization of
these techniques may involve greater than ordinary investment risks and the
likelihood of more volatile price fluctuation. See "Investment Objective and
Management Policies."
6
<PAGE>
SMITH BARNEY
Growth Opportunity 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 the fund's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
Maximum sales charge imposed on purchases
(as a percentage of offering price)......................... 5.00% None
Maximum CDSC (as a percentage of original cost or redemption
proceeds, whichever is lower)............................... None* 5.00%
- -------------------------------------------------------------------------------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of offering price)
Management Fees............................................... 1.00% 1.00%
12b-1 Fees**.................................................. 0.25 1.00
Other Expenses................................................ 0.47 0.46
- -------------------------------------------------------------------------------
Total Fund Operating Expenses................................ 1.72% 2.46%
</TABLE>
- --------------------------------------------------------------------------------
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee.
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B and certain Class A shares, the length of time the shares are held. See
"Purchase of Shares" and "Redemption of Shares." PFS receives an annual 12b-1
service fee of 0.25% of the value of average daily net assets of Class A
shares. With respect to Class B shares, PFS receives an annual 12b-1 fee of
1.00% of the value of average daily net assets of that Class, consisting of a
0.25% service fee and a 0.75% distribution fee. "Other expenses" in the above
table include fees for shareholder services, custodial fees, legal and account-
ing fees, printing costs and registration fees.
7
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A..................................... $67 $101 $139 $243
Class B..................................... 75 107 141 261
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $67 $101 $139 $243
Class B..................................... 25 77 131 261
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN ABOVE.
8
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1995 has been
audited in conjunction with the annual audits of the financial statements of
the Company by KPMG Peat Marwick LLP, independent auditors. The 1995 financial
statements and the independent auditors' report thereon appear in the December
31, 1995 Annual Report to Shareholders.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
1995
- -----------------------------------------------------------------------------
CLASS
CLASS A(1) B(1)
- -----------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $13.36 $13.36
- -----------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) 0.03 (0.02)
Net realized and unrealized gain 1.87 1.86
- -----------------------------------------------------------------------------
Total Income From Operations 1.90 1.84
- -----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.02) --
Net realized gains (0.93) (0.93)
- -----------------------------------------------------------------------------
Total Distributions (0.95) (0.93)
- -----------------------------------------------------------------------------
Net Asset Value, End of Period $14.31 $14.27
- -----------------------------------------------------------------------------
Total Return++ 14.61% $14.15
- -----------------------------------------------------------------------------
Net Assets, End of Period (000s) $57,693 $32,685
- -----------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.72% 2.46%
Net investment income (loss) 0.46 (0.27)
- -----------------------------------------------------------------------------
Portfolio Turnover Rate 51% 51%
- -----------------------------------------------------------------------------
Average commissions paid on equity security transactions $ 0.06 $ 0.06
- -----------------------------------------------------------------------------
</TABLE>
(1) For the period from July 3, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year. Total return represents the aggregate total
return for the period indicated and does not reflect any applicable sales
charge.
+ Annualized.
9
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund has an investment objective of achieving capital appreciation. It
seeks to achieve this objective by investing in securities believed to have
above average potential for capital appreciation. There can be no assurance
that the Fund will achieve its investment objective.
The Fund invests principally in common stocks and the Manager uses a flexible
management style to select what it believes to be unusually attractive growth
investments on an individual company basis. Such securities will typically be
issued by small capitalization companies, larger companies with established
records of growth in sales or earnings, and companies with new products, new
services, or new processes. 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 deben-
tures, and warrants.
The Fund generally holds a portion of its assets in investment grade short-
term debt securities, investment grade corporate or government bonds, cash and
cash equivalents in order to provide liquidity. Such investments may be
increased when deemed appropriate by SBMFM for temporary defensive purposes.
Under such circumstances, the Fund may invest up to 100% of its assets in
short-term investments which may include repurchase agreements with domestic
banks or broker-dealers. The Fund may invest up to 35% of its total assets in
securities of foreign issuers. The Fund may also engage in portfolio management
strategies and techniques involving options, futures contracts and options on
futures (which are sometimes referred to as "derivatives"). A derivative is a
financial instrument whose performance is derived, at least in part, from the
performance of an underlying asset. The Fund's use of derivatives is limited to
10% of the Fund's net assets.
Investments in smaller capitalized companies (companies with a capitalization
of less than $1 billion) may offer greater opportunities for growth of capital
than larger, more established companies, but may also involve certain risks
because smaller capitalized companies often have limited product use, market or
financial resources and may be dependent on one or two people for management.
In addition, smaller capitalized companies may be subject to a limited liquid-
ity and more volatility which could result in significant fluctuations in the
price of their shares. The Fund may also purchase restricted securities (sub-
ject to a limit on all illiquid securities of 15% of total assets), invest in
money market
10
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
instruments, enter into repurchase agreements for temporary defensive purposes,
lend its portfolio securities and enter into forward contracts.
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 may not be
changed without the "vote of a majority of the outstanding voting securities",
as defined in the Investment Company of 1940, as amended (the "1940 Act").
Except for the objective and those restrictions specifically identified as fun-
damental, all investment policies and practices described in this Prospectus
and in the Statement of Additional Information are non-fundamental, which may
be changed by the Board of Directors, without shareholder approval.
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
Repurchase Agreements. The Fund may enter into repurchase agreement transac-
tions 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 obli-
gation 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 securi-
ties, the risk of a possible decline in the value of the underlying securities
during the period in which the Fund seeks to assert its rights to them, the
risk of incurring expenses associated with asserting those rights and the risk
of losing all or part of the income from the agreement. SBMFM, acting under the
supervision of the Board of Directors, reviews on an ongoing basis the value of
the collateral and the 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 con-
cerning the securities markets. The purchase and sale of options and
11
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 in managing the Fund's investments,
the Fund's performance will be worse than if the Fund did not make such invest-
ments. The Fund may write or purchase options in privately negotiated transac-
tions ("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 pur-
chased 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 write or purchase options, pur-
chase or sell futures contracts or related options for which the aggregate ini-
tial margin and premiums exceed 5.00% 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, cash equivalents or 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 15% of its net assets in illiquid securities and repurchase agreements
which have a maturity of longer than seven days. A more complete discussion of
the potential risks involved in transactions involving options or futures con-
tracts and related options, is contained in the Statement of Additional Infor-
mation.
Foreign Securities. The Fund may also invest in securities of foreign issuers
of developed and emerging market countries, including non-U.S. dollar denomi-
nated securities, Eurodollar securities and securities issued, assumed or guar-
anteed by foreign governments, political subdivisions or instrumentalities
thereof. The Fund will limit its investment in foreign securities to 35% of its
total assets. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investments, including fluctuations in foreign exchange rates, future
foreign political and economic developments and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in secu-
rities denominated or quoted in currencies other than the U.S. dollar, changes
in foreign currency exchange rates will, to the extent the Fund does not ade-
quately hedge against such fluctuations, affect the value of securities in its
portfolio. In addition, with respect to
12
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
certain countries, there is the possibility of expropriation of assets, repa-
triation, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
There also may be less publicly available information about a foreign com-
pany than about a U.S. company and foreign companies may not be subject to
accounting, auditing and financial reporting standards comparable to those of
U.S. companies.
The Fund may also purchase foreign securities in the form of American Deposi-
tary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are pub-
licly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements.
Foreign Currency Transactions. The value of the Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Fund will
incur costs in connection with the conversions between various currencies. The
Fund's foreign currency exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund pur-
chases and sells foreign currency on a spot basis in connection with the set-
tlement of transactions in securities traded in such foreign currency. The
Fund does not purchase and sell foreign currencies as an investment.
The Fund may also enter contracts with banks or other foreign currency bro-
kers and dealers in which the Fund purchases or sells foreign currencies at a
future date ("futures contracts") and purchase and sell foreign currency
futures contracts to hedge against changes in foreign currency exchange rates.
A foreign currency forward contract is a negotiated agreement between the con-
tracting parties to exchange a specified amount of currency at a specified
future time at
13
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
a specified rate. The rate can be higher or lower than the spot rate between
the currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the U.S. dollar
in relation to a foreign currency by entering into a forward contract for the
purchase or sale of the amount of foreign currency invested or to be invested,
or by buying or selling a foreign currency futures contract for such amount.
Such hedging strategies may be employed before the Fund purchases a foreign
security traded in the hedged currency which the Fund anticipates acquiring or
between the date the foreign security is purchased or sold and the date on
which payment therefor is made or received. Hedging against a change in the
value of a foreign currency in the foregoing manner does not eliminate fluctua-
tions in the price of portfolio securities or prevent losses if the prices of
such securities decline. Furthermore, such hedging transactions reduce or pre-
clude the opportunity for gain if the value of the hedged currency should move
in the direction opposite to the hedged position. The Fund will not speculate
in foreign currency forward or futures contracts or through the purchase and
sale of foreign currencies.
Forward Commitments. The Fund may purchase or sell debt securities on a "when-
issued" or "delayed delivery" basis ("Forward Commitments"). These transactions
occur when securities are purchased or sold by the Fund with payment and deliv-
ery taking place in the future (a month or more after such transactions). The
price is fixed on the date of the commitment and the seller continues to accrue
interest on the securities covered by the Forward Commitment until delivery and
payment take place. At the time of settlement, the market value of the securi-
ties may be more or less than the purchase or sale price.
Loans of Portfolio Securities. The Fund may lend its portfolio securities pro-
vided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities or cash or cash equivalents maintained on a daily marked-
to-market basis in an amount at least equal to the current market value of the
securities loaned; (b) the Fund may at any time call the loan and obtain the
return of the securities loaned; (c) the Fund will receive any interest or div-
idend 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.
Restricted Securities. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual restric-
tions on their resale. Such restrictions might prevent the sale of restricted
securities at a time
14
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
when such sale would otherwise be desirable. Restricted securities and securi-
ties for which there is no readily available market ("illiquid assets") will
not be acquired if the total amount of all illiquid assets of the Fund would
exceed 10% of the Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney), which in its best judgment pro-
vide prompt and reliable execution at favorable prices and reasonable commis-
sion 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.
It is anticipated that the annual portfolio turnover rate of the Fund normally
will be less than 100%. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal 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.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value, or, in the
absence of a market value with respect to any securities, at fair value. Secu-
rities 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 assis-
tance of a pricing service and are generally valued at the preceding closing
values of such
15
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
VALUATION OF SHARES (CONTINUED)
securities on their respective exchange, except that when an occurrence subse-
quent 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 considera-
tion 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 valua-
tion. Any assets or liabilities initially expressed in terms of foreign curren-
cies 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'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 dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4.00% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed ordi-
nary income or capital gains and expects to pay any other dividends and distri-
butions necessary to avoid the application of this tax.
The per share dividends on Class B shares of the Fund may be lower than the
per share dividends on Class A shares principally as a result of the distribu-
tion fee applicable with respect to Class B shares. Distributions of capital
gains, if any, will be in the same amount for Class A and Class B shares.
TAXES
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code. To qualify, the Fund must first meet cer-
16
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
tain tests, including the distribution of at least 90% of its investment com-
pany 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).
Distributions of any investment company taxable income are taxable to share-
holders 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 gain dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date
in such a month will be deemed to have been received by shareholders on Decem-
ber 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 capi-
tal assets in the shareholder's hands, and generally will be long-term or
short-term depending upon the shareholder's holding period for the shares. Any
loss realized by a shareholder on disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss
to the extent of any distributions of capital gains dividends received by the
shareholder with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends 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 two Classes of shares to investors purchasing through PFS
Investments Representatives. Class A shares are sold to investors with an ini-
tial sales charge and Class B shares are sold without an initial sales charge
but are
17
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
subject to a CDSC payable upon certain redemptions. See "Prospectus Summary--
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Initial purchases of Fund shares must be made through a PFS Investments Rep-
resentative by completing the appropriate application found in the prospectus.
The completed application should be forwarded to the Sub-Transfer Agent, 3100
Breckinridge Blvd., Bldg 200, Duluth, Georgia 30199-0062. Checks drawn on for-
eign banks must be payable in U.S. dollars and have the routing number of the
U.S. bank encoded on the check. Subsequent investments may be sent directly to
the Sub-Transfer Agent.
Investors in Class A and Class B shares may open an account by making an ini-
tial investment of at least $1,000 for each account, or $250 for an IRA or a
Self-Employed Retirement Plan in the Fund. The initial investment amount will
be waived for accounts establishing a Systematic Investment Plan. Subsequent
investments of at least $25 may be made for both Classes. For participants in
retirement plans qualified under Section 403(b)(7) of the Code, the minimum
initial and subsequent investment requirement for both Classes in the Fund is
$25. For the Fund's Systematic Investment Plan, the minimum initial and subse-
quent investment requirement for both 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 Sub-Transfer Agent. Share certificates are issued only upon a
shareholder's written request to the Sub-Transfer Agent.
Purchase orders received by the Sub-Transfer Agent prior to the close of reg-
ular 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.
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, the Sub-Transfer Agent is authorized through pre-
authorized transfers of $50 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or quar-
terly 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 PFS or the Sub-Transfer Agent.
18
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 - AND OVER * * *
- ---------------------------------------------------------------------------
</TABLE>
* PURCHASES OF CLASS A SHARES, WHICH WHEN COMBINED WITH CURRENT HOLDINGS OF
CLASS A SHARES OFFERED WITH A SALES CHARGE EQUAL OR EXCEED $500,000 IN THE
AGGREGATE, WILL BE MADE AT NET ASSET VALUE WITHOUT ANY INITIAL SALES CHARGE,
BUT WILL BE SUBJECT TO A CDSC OF 1.00% ON REDEMPTIONS MADE WITHIN 12 MONTHS
OF PURCHASE. THE CDSC ON CLASS A SHARES IS PAYABLE TO PFS, WHICH IN TURN,
PAYS PFS INVESTMENTS TO COMPENSATE ITS INVESTMENTS REPRESENTATIVES 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 SHARES IS WAIVED. SEE
"DEFERRED SALES CHARGE ALTERNATIVES" AND "WAIVERS OF CDSC."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales 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, prof-
it-sharing or other benefit plan for such persons and (ii) employees of mem-
bers 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) shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another fund in 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; (d) accounts managed by registered
investment advisory subsidiaries of Travelers; and (e) sales through PFS
Investments Representatives where the amounts invested represent the redemp-
tion proceeds from investment companies distributed by an entity other than
PFS, on the condition that
19
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
(i) the redemption has occurred no more than 60 days prior to the purchase of
the shares, (ii) the shareholder paid an initial sales charge on such redeemed
shares and (iii) the shares redeemed were not subject to a deferred sales
charge. PFS Investments may pay its Investments Representatives an amount
equal to 0.40% of the amount invested if the purchase represents redemption
proceeds from an investment company distributed by an entity other than PFS.
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.
VOLUME DISCOUNTS
The "Amount of Investment" referred to in the sales charge table set forth
above under "Initial Sales Charge Alternative--Class A Shares" includes the
purchase of Class A shares in the Fund and of other funds sponsored by Smith
Barney that are offered with a sales charge listed under "Exchange Privilege."
A person eligible for a volume discount includes an individual; members of a
family unit comprising a husband, wife and minor children; a trustee or other
fiduciary purchasing for a single fiduciary account including pension, profit-
sharing and other employee benefit trusts qualified under Section 401(a) of
the Code, or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction
for qualified and nonqualified accounts and transmitted by a common employer
entity. Employer entity for payroll deduction accounts may include trade and
craft associations and any other similar organizations.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating the investments
over a 13-month period, provided that the investor refers to such Letter when
placing orders. For purposes of a Letter of Intent, the "Amount of Investment"
as referred to in the preceding sales charge table includes purchases of all
Class A shares of the Fund and other funds of the Smith Barney Mutual Funds
that are offered with a sales charge listed under "Exchange Privilege" over a
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 exe-
cution 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
20
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
the goal is not achieved within the period, the investor must pay the differ-
ence between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares will be
redeemed.
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; and (b)
Class A shares which when combined with Class A shares offered with a sales
charge currently held by an investor equal or exceed $500,000 in the
aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
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 pur-
chase 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.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth 0.00
Seventh 0.00
Eighth 0.00
- --------------------------------
</TABLE>
21
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
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 will also be converted at that time such propor-
tion of Class B Dividend Shares owned by the shareholder as the total number of
his or her Class B shares converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder.
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 distribu-
tions 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 Smith Barney Mutual
Funds, and Fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to PFS.
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 pur-
chase, 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 appre-
ciation ($200) and the value of the reinvested dividend shares ($60). There-
fore, $240 of the $500 redemption proceeds ($500 -$260) would be charged at a
rate of 4% (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 "Redemption of Shares--Automatic Cash Withdrawal Plan"); (c) redemption of
shares within 12 months following the death or disability of the shareholder;
(d) redemption of shares made in connection with qualified distributions from
retirement plans or IRAs upon the attainment of age 59 1/2;
22
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PURCHASE OF SHARES (CONTINUED)
(e) involuntary redemptions; and (f) redemption 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 PFS of the sharehold-
er's status or holdings, as the case may be.
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 and Class B
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made and a
sales charge differential may apply.
FUND NAME
. 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
. Smith Barney Appreciation Fund Inc.
. Smith Barney Investment Grade Bond Fund
*. Smith Barney Money Funds, Inc.--Cash Portfolio
**. Smith Barney Exchange Reserve Fund
* Available for exchange with Class A shares of the Fund
** Available for exchange with Class B 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 charged
by other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of their shares for Class A shares of a
fund sold with a higher sales charge. The "sales charge differential" is lim-
ited 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 pur-
poses
23
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
EXCHANGE PRIVILEGE (CONTINUED)
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, if no sales charge was imposed upon the initial purchase
of the shares, any shares obtained through automatic reinvestment will be sub-
ject to a sales charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder 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.
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. The Manager
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, the
Manager will notify PFS that the Fund and PFS may, at its discretion, decide
to limit additional purchases and/or exchanges by the shareholder. Upon such a
determination by the Fund, PFS will provide notice in writing or by telephone
to the shareholder at least 15 days prior to suspending the exchange privilege
and during the 15-day period the shareholder will be required to (a) redeem
his or her shares in the Fund or (b) remain invested in the Fund or exchange
into any of the Smith Barney Mutual Funds listed under "Exchange Privilege",
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below
are also applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the account registra-
tion 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.
24
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares of the Fund at
any time by sending a written request in proper form directly to the Sub-Trans
fer Agent, PFS Shareholder Services, at 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0062. If you should have any questions concerning how to
redeem your account after reviewing the information below, please contact the
Sub-Transfer Agent at (800) 544-5445, Spanish-speaking representatives (800)
544-7278 or TDD Line for the Hearing Impaired (800) 824-1721.
As described under "Purchase of Shares," redemptions of Class B shares are
subject to a contingent deferred sales charge.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account regis-
tration. If the proceeds of the redemption exceed $50,000, or if the proceeds
are not to be paid to the record owner(s) at the record address, if the share-
holder(s) has had an address change in the past 45 days, or it the sharehold-
er(s) is a corporation, sole proprietor, partnership, trust or fiduciary, sig-
nature(s) must be guaranteed by one of the following: a bank or trust company;
a broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a savings and loan association; or
a federal savings bank.
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accompany the redemption request. Additional documentary evidence of authority
is also required by the Sub-Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or admin-
istrator. Additionally, if a shareholder requests a redemption from a Retire-
ment Plan account (IRA, SEP or 403(b)(7) ), such request must state whether or
not federal income tax is to be withheld from the proceeds of the redemption
check.
Shareholders may utilize the Sub-Transfer Agent's FAX to redeem their account
as long as a signature guarantee or other documentary evidence is not
required. Redemption requests should be properly signed by all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-2374. Facsimile
redemptions may not be available if the shareholder cannot reach the Sub-
Transfer Agent by FAX, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure described above. Facsimile redemptions received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day
will be processed at the net asset value per share determined that day.
25
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
REDEMPTION OF SHARES (CONTINUED)
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed will be made by
check mailed within three days after acceptance by the Sub-Transfer Agent of
the request and any other necessary documents in proper order. Such payment may
be postponed or the right of redemption suspended as provided by the rules of
the SEC. If the shares to be redeemed have been recently purchased by check or
draft, the Sub-Transfer Agent may hold the payment of the proceeds until the
purchase check or draft has cleared, usually a period of up to 15 days. Any
taxable gain or loss will be recognized by the shareholder upon redemption of
shares.
After following the above-stated redemption guidelines, a shareholder(s) may
elect to have the redemption proceeds wire-transferred directly to the share-
holder's bank account of record (defined as a currently established pre-autho-
rized draft on the shareholder's account with no changes within the previous 45
days), as long as the bank account is registered in the same name(s) as the
account with the Fund. If the proceeds are not to be wired to the bank account
of record, or mailed to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the Sub-
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinar-
ily be credited to your bank account by your bank within 48 to 72 hours.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact the Sub-Transfer Agent.
26
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
PERFORMANCE
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A and Class B
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 speci-
fied period of time assuming deduction of the maximum sales charge, if any,
from the initial amount invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at prices calculated as
stated in this Prospectus, then dividing the value of the investment at the end
of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the Securities
and Exchange Commission 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 pre-
sented. 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 informa-
tion may include data from Lipper Analytical Services, Inc. and other financial
publica-
27
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
PERFORMANCE (CONTINUED)
tions. The Fund will include performance data for Class A and Class B shares
in any advertisement or information including performance data of the Fund.
The Fund may from time to time illustrate the benefits of tax-deferral by
comparing taxable investments to investments made through tax-deferred retire-
ment plans and the Fund may illustrate in graph or chart form, or otherwise,
the benefits of the Systematic Investment Plan by comparing investments made
pursuant to a systematic investment plan to investments made in a rising mar-
ket.
MANAGEMENT OF 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, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment manager. The Statement of Additional
Information contains background information regarding each Director of
the Fund and executive officer of the Company.
SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser and manages the day-to-day operations of the
Fund pursuant to a management agreement entered into by the Company, on behalf
of the Fund. SBMFM (through its predecessors) has been in the investment coun-
seling business since 1934 and is a registered investment adviser. SBMFM ren-
ders investment advice to investment companies that had aggregate assets under
management as of January 31, 1996, in excess of $74 billion.
Subject to the supervision and direction of the Company's Board of Directors,
the Manager 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 portfo-
lio managers and securities analysts who provide research services to the
Fund. For the services rendered, the Fund pays the Manager a monthly fee at
the annual rate of 1.00% of the value of its average daily net assets.
Although
28
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
MANAGEMENT OF THE FUND (CONTINUED)
this fee is higher than that paid by most investment companies, the Fund's
management has determined that it is comparable to the fee charged by other
investment advisers of investment companies that have similar investment
objectives and policies.
PORTFOLIO MANAGEMENT
Harvey Eisen, Vice President of Smith Barney Advisers, Inc., a subsidiary of
SBMFM, and Senior Vice President of Investment Operations for Travelers,
serves as Vice President of the Fund and is responsible for managing the day-
to-day investment operations of the Fund, including the making of investment
decisions. Mr. Eisen has been Senior Vice President of Investment Operations
for Travelers since 1992. Prior to that Mr. Eisen was President of SunAmerica
Asset Management.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended December 31, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from the Sub-Transfer Agent or by
writing or calling the Fund at the address or phone number listed on page one
of this Prospectus.
DISTRIBUTOR
PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30199-0001.
PFS distributes shares of the Fund as principal underwriter and as such con-
ducts a continuous offering pursuant to a "best efforts" arrangement requiring
PFS 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"), PFS is paid an annual service fee with respect to
Class A and Class B shares of the Fund at the annual rate of 0.25% of the
average daily net assets of the respective Class. PFS is also paid an annual
distribution fee with respect to Class B shares at the annual rate of 0.75% of
the average daily net assets attributable to that Class. 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 paid to
PFS which, in turn pays PFS Investments to pay its Investments Representatives
for servicing shareholder accounts and, in the case of Class B shares, to
cover expenses primarily intended to result in the sale of those shares. These
expenses include: advertis- ing expenses; the cost of printing and mailing
prospectuses to potential invest
29
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
DISTRIBUTOR (CONTINUED)
ors; payments to and expenses of Investment Representatives 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 PFS
Investments associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to PFS Investments Representatives for selling shares of a Class
include a commission or fee paid by the investor or PFS at the time of sale
and a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Investments Representatives may
receive different levels of compensation for selling different Classes of
shares.
PFS Investments may be deemed to be an underwriter for purposes of the Secu-
rities Act of 1933. From time to time, PFS or its affiliates may also pay for
certain non-cash sales incentives provided to PFS Investments Representatives.
Such incentives do not have any effect on the net amount invested. In addition
to the reallowances from the applicable public offering price described above,
PFS may, from time to time, pay or allow additional reallowances or promo-
tional incentives, in the form of cash or other compensation to PFS Invest-
ments Representatives that sell shares of the Fund.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by PFS and the payments may
exceed distribution expenses actually incurred. The Company's Board of Direc-
tors 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 PFS, amounts received under the Plan and proceeds of the
CDSC.
ADDITIONAL INFORMATION
The Company was incorporated under the laws of the State of Maryland pursuant
to Articles of Incorporation dated September 29, 1981, as amended from time to
time. The Fund was organized in 1995 and through a reorganization acquired the
assets of the Growth Opportunity Fund, a separate series fund of Common Sense
Trust. The Fund offers to investors purchasing through PFS shares of common
stock currently classified into two Classes, A and B, with a par value of
$.001 per share. Each Class represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privi-
leges 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
30
<PAGE>
SMITH BARNEY
Growth Opportunity Fund
ADDITIONAL INFORMATION (CONTINUED)
and/or service fees borne by each Class pursuant to the Plan; (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 conflicts exists and, if so, take appropriate action.
PNC Bank located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103 serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc. is located at Exchange Place, Bos-
ton, Massachusetts 02109 and serves as the Company's transfer agent.
PFS Shareholder Services is located at 3100 Breckinridge Blvd, Bldg 200,
Duluth, Georgia 30199-0062 and serves as the Fund's Sub-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 pur-
pose upon written request of shareholders holding at least 10% of the
Company's outstanding shares and the Company will assist shareholders in call-
ing 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 its shareholders a semi-annual report and an audited
annual report, which include a listing of the investment securities held by
the Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Company plans to consolidate the mailing of
its semi-annual and annual reports by household. This consolidation means that
a household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having mul-
tiple 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 the Sub-
Transfer Agent.
----------------------
31
<PAGE>
- --------------------------------------------------------------------------------
SMITH BARNEY
------------
A Member of Travelers Group[ART]
Smith
Barney
Growth
Opportunity
Fund
3100 Breckinridge Blvd, Bldg 200
Duluth, Georgia 30199-0062
FDXXXX XX
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
purposes that is, futures contracts will be sold (or related put options
purchased) to protect against a decline in the price of securities that the
Fund owns, or futures contracts (or related call options) will be purchased to
protect the Fund against an increase in the price of securities it is
committed to purchase. 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
" 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
Opportuni
ty
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
$
$1,077,3
46
201,7
06
Commissions paid to
Smith Barney*
1993
$87,550
$16,614
N/A
$N/A
1994
$0
$14,280
N/A
$N/A
1995
$0
$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
0
6%
Growth Opportunity Fund
0
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
0
0
5,400,000
Growth Opportunity Fund
0
0
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
0
0
174,000
Growth Opportunity Fund
0
0
0
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
0
0
189,955
Growth Opportunity Fund
0
0
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
0
0
351,874
Growth Opportunity Fund
0
0
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
0
0
47,170
Growth Opportunity Fund
0
0
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
0
0
1,055,621
Growth Opportunity Fund
0
0
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
0
141,508
Growth Opportunity Fund
0
0
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
0
0
0
Growth Opportunity Fund
0
0
0
__________________
(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.
14
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays SBMFM
a fee at the following annual rates of average daily net assets: 0.20% to $500
million; and 0.18% in excess of $500 million.
SMITH BARNEY INVESTMENT FUNDS PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended December 31, 1995
and the reports of Independent
Accounts are incorporated by reference to the definitive 30b2-1 filed on
March 15, 1996 as accession number
91155-96-000116.
(b) Exhibits
All references are to the Registrant's registration statement on Form N-1A
(the "Registration Statement") as filed with the SEC on October 2, 1981
(File Nos. 2-74288 and 811-3275).
(1) Articles of Restatement dated September 17, 1993 to Registrant's
Articles of Incorporation dated September 28, 1981, Articles of Amendment
dated October 14, 1994, Articles Supplementary, Articles of Amendment dated
October 14, 1994, Articles Supplementary, Articles of Amendments and
Certificates of Correction dated November 7, 1994, are incorporated by
referene to Post-Effective Amendment No. 37 to the Registration Statement
filed on November 7, 1994 ("Post Effective Amendment No. 37").
(2) Registrant's By-Laws, as amended on September 30, 1992 are incorporated
by reference to Post-Effective Amendment No. 30 to the Registration Statement
filed on April 30, 1993.
(3) Not Applicable.
(4) Registrant's form of stock certificate for Class A, Class B and Class D
are incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(5) (a) Investment Advisory Agreement dated July 30, 1993, between the
Registrant on behalf of Smith Barney Investment Grade Bond Fund, Smith
Barney Government Securities Fund and Smith Barney Special Equities Fund and
Green Street Advisors is incorporated by reference to the Registration
Statement filed on Form N-14 on September 2, 1993, File No. 33-50153.
(b) Investment Advisory Agreement dated April 8, 1994, between the
Registrant on behalf of Smith Barney European Fund and Smith Barney Advisers,
Inc. is incorporated by reference to Post-Effective Amendment No. 35 to the
Registration Statement filed on June 23, 1994.
(c) Investment Advisory Agreements on behalf of Smith Barney Growth
Opportunity Fund and Smith Barney Managed Growth Fund is incorporated by
reference to Post-Effective Amendment No. 40 filed on June 27, 1995.
(6) (a) Distribution Agreement dated July 30, 1993, between the
Registrant and Smith Barney Shearson Inc. is incorporated by reference to
the registration statement filed on Form N-14 on September 2, 1993.
File 33-50153.
(b) Supplement to the Distribution Agreement between the Registrant and
Smith Barney Inc. on behalf of Smith Barney Growth Opportunity Fund
and Smith Managed Growth Fund will be filed by amendment.
(c) Form of Distribution Agreement between the Registrant and PFS
Distributors on behalf of Smith Barney Investment Funds Inc. is incorporated
by reference to Post-Effective Amendment No. 40 filed on June 27, 1995.
(7) Not Applicable.
(8)(a) Custodian Agreement with Boston Safe Deposit and Trust Company is
incorporated by reference to Post-Effective Amendment No.20 as filed on
September 6, 1988.
(b) Custodian Agreement with PNC Bank, National Associates will be filed
by amendment.
(9)(a) Administration Agreement dated May 5, 1994, between the Registrant,
SBA and The Boston Boston Company Advisors, Inc. is incorporated by reference
to Post-Effective Amendment No. 37.
(c) Transfer Agency and Registrar Agreement dated August 5, 1993
with The Shareholder Services Group, Inc. ("TSSG") is incorporated by
reference to Post-Effective Amendment No. 31 as filed on December 22, 1993
(Post-Effective Amendment No. 31").
(d) Supplement to the Transfer Agency and Registrar Agreement
between the Registrant and TSSG on behalf
of Smith Barney Growth Opportunity Fund and Smith Barney Managed Growth Fund
will be filed by amendment.
(e) Sub-Transfer Agency Agreement between the Registrant and PFS
Shareholders Services on behalf of Smith Barney Investment Funds Inc. is
incorporated by reference to Post-Effective Amendment No. 4o filed on
June 27, 1995.
(10) Not applicable
(11) Not applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) (a) Amended Services and Distribution Plans pursuant to Rule 12b-1 between
the Registrant on behalf of Smith Barney Invest Grade Bond Fund, Smith Barney
Government Securities Fund, Smith Barney Special Equities Fund and Smith
Barney European Fund and Smith Barney, Inc. ("Smith Barney") are incorporated
by reference to Post-Effective Amendment No. 37'
(b) Form of Services and Distribution Plans pursuant to Rule 12b-1
between the Registrant
on behalf of Smith Barney Growth Opportunity Fund and Smith Barney
Managed Growth Fund is incorporated by reference to Post-Effective Amendment
No. 40 filed on June 27, 1995.
(16) Performance Date is incorporated by reference to Post-Effective
Amendment No. 22 as filed on May 1, 1989.
(17) Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 31.
(18) Plan pursuant to Rule 18f-3 is incorporated by reference to Post-
Effective Amendment No. 42 to Registration Statement dated January 10, 1996.
Item 25 Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(2) (1)
Number of Record Holders as of March 31, 1996 Title of Class
Common Stock par value Class A Class B Class C
Class Y Class Z
$.001 per share
Special Equities
Fund 21,423 24,303 1,538 2 1
Investment Grade
Bond Fund 15,295 15,587 272 1
Investment Grade
Bond Fund PFS 534 517
Government
Securities Fund 29,199 9,596 78
4
Growth Opportunity Fund 94 130 16
Growth Opportunity Fund PFS 10,847 6,405 --
Managed Growth Fund -- -- --
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-
Effective Amendment No. 1 to the registration statement filed on Form N-14
on October 8, 1993 (File No. 33-50153).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith Barney Advisers, Inc. ("SBMFM")
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings") (formerly known as Smith Barney Shearson Holdings Inc.), which
in turn is a wholly owned subsidiary of Travelers Group Inc. (formerly known
as Primerica Corporation) ("Travelers"). SBMFM is registered as an
investment adviser under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D
of FORM ADV filed by SBMFM
pursuant to the Advisers Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney Managed Governments
Fund Inc., Smith Barney Income Funds, Smith Barney Equity Funds, Smith
Barney Investment Funds Inc., Smith Barney Precious Metals and Minerals
Fund Inc., Smith Barney Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey Municipals Fund Inc., The USA
High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., Smith
Barney Fundamental Value Fund Inc., Smith Barney Series Fund, Consulting
Group Capital Markets Funds, Smith Barney Income Trust, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney Florida Municipals
Fund, Smith Barney Oregon Municipals Fund, Smith Barney Funds, Inc., Smith
Barney Muni Funds, Smith Barney World Funds, Inc., Smith Barney Money
Funds, Inc., Smith Barney Tax Free Money Fund, Inc., Smith Barney Variable
Account Funds, Smith Barney U.S. Dollar Reserve Fund (Cayman), Worldwide
Special Fund, N.V., Worldwide Securities Limited, (Bermuda), Smith Barney
International Fund (Luxembourg) and various series of unit investment
trusts.
Smith Barney is a wholly owned subsidiary of Holdings. On June 1, 1994,
Smith Barney changed its
name from Smith Barney Shearson Inc. to its current name. The information
required by this Item 29 with respect to each director, officer and partner of
Smith Barney is incorporated by
reference to Schedule A of FORM BD filed by Smith Barney pursuant to the
Securities Exchange Act of 1934
(SEC File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
The Registrant hereby undertakes to furnish to each person to whom a
prospectus of any series of the Registrant is delivered a copy of the
Registrant's latest annual report, upon request and without charge.
485(b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, SMITH BARNEY INVESTMENT FUNDS INC., has duly caused
this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the
City of New York, State of New York on the 19th day of April, 1996.
SMITH BARNEY INVESTMENT FUNDS INC.
By: /s/ Heath B. McLendon*
Heath B. McLendon
Chief Executive Officer
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board 04/19/96
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone* Senior Vice President
Lewis E. Daidone and Treasurer 04/19/96
/s/ Paul R. Ades * Director 04/19/96
Paul R. Ades
/s/ Herbert Barg* Director 04/19/96
Herbert Barg
/s/ Alger B. Chapman* Director 04/19/96
Alger B. Chapman
/s/ Dwight B. Crane* Director 04/19/96
Dwight B. Crane
/s/ Frank Hubbard* Director 04/19/96
Frank Hubbard
/s/ Allan R. Johnson* Director 04/19/96
Allan R. Johnson
/s/ Ken Miller* Director 04/19/96
Ken Miller
/s/ John F. White* Director 04/19/96
John F. White
*Signed by Lee D. Augsburger, their duly authorized attorney-in-
fact, pursuant to power of attorney dated November 3, 1994.
/s/ Lee D. Augsburger
Lee D. Augsburger
EXHIBITS
Exhibit No. Description of Exhibits
1 Cover Letter to SEC
2 Consent of Auditors
. 3 Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Directors of
Smith Barney Investment Funds, Inc.:
We consent to the use of our reports dated February 16, 1996 with respect to the
Funds listed below of
Smith Barney Investment Funds, Inc. incorporated herein by reference and to
the references to our Firm
under the headings "Financial Highlights" in the Prospectuses and
"Counsel and Auditors" in the
Statement of Additional Information.
Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Government Securities Fund
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
KPMG PEAT MARWICK LLP
New York, New York
April 29, 1996
</TEXT.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
<NUMBER> 3
<NAME> GROWTH OPPORTUNITY FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 83,136,349
<INVESTMENTS-AT-VALUE> 94,874,389
<RECEIVABLES> 559,466
<ASSETS-OTHER> 1,004
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,434,859
<PAYABLE-FOR-SECURITIES> 4,153,411
<SENIOR-LONG-TERM-DEBT> 416,404
<OTHER-ITEMS-LIABILITIES> 398,63752
<TOTAL-LIABILITIES> 4,968,452
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,949,609
<SHARES-COMMON-STOCK> 4,028,314
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 853,540
<OVERDISTRIBUTION-NII> 564
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 220,678
<ACCUM-APPREC-OR-DEPREC> 11,738,040
<NET-ASSETS> 90,466,407
<DIVIDEND-INCOME> 576,132
<INTEREST-INCOME> 275,508
<OTHER-INCOME> 0
<EXPENSES-NET> 772,850
<NET-INVESTMENT-INCOME> 80,689
<REALIZED-GAINS-CURRENT> 5,045,316
<APPREC-INCREASE-CURRENT> 5,383,267
<NET-CHANGE-FROM-OPS> 10,428,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 81,128
<DISTRIBUTIONS-OF-GAINS> 3,388,456
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,505,849
<NUMBER-OF-SHARES-REDEEMED> 992,400
<SHARES-REINVESTED> 3,469,509
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 390,902
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 772,851
<AVERAGE-NET-ASSETS> 50,537,027
<PER-SHARE-NAV-BEGIN> 13.36
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.020
<PER-SHARE-DISTRIBUTIONS> 0.930
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.31
<EXPENSE-RATIO> 0.865
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 3
<NAME> GROWTH OPPORTUNITY FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 83,136,349
[INVESTMENTS-AT-VALUE] 94,874,389
[RECEIVABLES] 559,466
[ASSETS-OTHER] 1,004
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 95,434,859
[PAYABLE-FOR-SECURITIES] 4,153,411
[SENIOR-LONG-TERM-DEBT] 416,404
[OTHER-ITEMS-LIABILITIES] 398,63752
[TOTAL-LIABILITIES] 4,968,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 78,949,609
[SHARES-COMMON-STOCK] 2,287,229
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 853,540
[OVERDISTRIBUTION-NII] 564
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 220,678
[ACCUM-APPREC-OR-DEPREC] 11,738,040
[NET-ASSETS] 90,466,407
[DIVIDEND-INCOME] 576,132
[INTEREST-INCOME] 275,508
[OTHER-INCOME] 0
[EXPENSES-NET] 772,850
[NET-INVESTMENT-INCOME] 80,689
[REALIZED-GAINS-CURRENT] 5,045,316
[APPREC-INCREASE-CURRENT] 5,383,267
[NET-CHANGE-FROM-OPS] 10,428,583
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 1,882,868
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,582,175
[NUMBER-OF-SHARES-REDEEMED] 262,477
[SHARES-REINVESTED] 1,882,868
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 390,902
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 772,851
[AVERAGE-NET-ASSETS] 27,108,349
[PER-SHARE-NAV-BEGIN] 13.36
[PER-SHARE-NII] (0.019)
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.930
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 14.27
[EXPENSE-RATIO] 1.24
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 3
<NAME> GROWTH OPPORTUNITY FUND - CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 83,136,349
[INVESTMENTS-AT-VALUE] 94,874,389
[RECEIVABLES] 559,466
[ASSETS-OTHER] 1,004
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 95,434,859
[PAYABLE-FOR-SECURITIES] 4,153,411
[SENIOR-LONG-TERM-DEBT] 416,404
[OTHER-ITEMS-LIABILITIES] 398,63752
[TOTAL-LIABILITIES] 4,968,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 78,949,609
[SHARES-COMMON-STOCK] 6,160
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 853,540
[OVERDISTRIBUTION-NII] 564
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 220,678
[ACCUM-APPREC-OR-DEPREC] 11,738,040
[NET-ASSETS] 90,466,407
[DIVIDEND-INCOME] 576,132
[INTEREST-INCOME] 275,508
[OTHER-INCOME] 0
[EXPENSES-NET] 772,850
[NET-INVESTMENT-INCOME] 80,689
[REALIZED-GAINS-CURRENT] 5,045,316
[APPREC-INCREASE-CURRENT] 5,383,267
[NET-CHANGE-FROM-OPS] 10,428,583
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 81,128
[DISTRIBUTIONS-OF-GAINS] 941
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 85,251
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 941
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 390,902
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 221
[AVERAGE-NET-ASSETS] 24,143
[PER-SHARE-NAV-BEGIN] 14.05
[PER-SHARE-NII] 0.936
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.930
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 14.29
[EXPENSE-RATIO] 0.916
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 2
<NAME> GOVERNMENT SECURITIES FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 753,708,213
[INVESTMENTS-AT-VALUE] 779,307,991
[RECEIVABLES] 118,098,453
[ASSETS-OTHER] 340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 897,406,787
[PAYABLE-FOR-SECURITIES] 152,765,525
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 133,163,872
[TOTAL-LIABILITIES] 285,929,397
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 804,536,758
[SHARES-COMMON-STOCK] 46,316,287
[SHARES-COMMON-PRIOR] 52,579,944
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (945,370)
[ACCUMULATED-NET-GAINS] (217,713,779)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25,599,781
[NET-ASSETS] 611,477,390
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 52,587,757
[OTHER-INCOME] (2,633,226)
[EXPENSES-NET] (6,994,878)
[NET-INVESTMENT-INCOME] 42,959,653
[REALIZED-GAINS-CURRENT] 12,784,089
[APPREC-INCREASE-CURRENT] 29,027,947
[NET-CHANGE-FROM-OPS] 84,771,689
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 33,440,120
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 695,391
[NUMBER-OF-SHARES-REDEEMED] 9,230,741
[SHARES-REINVESTED] 2,271,693
[NET-CHANGE-IN-ASSETS] (44,278,335)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,594,874
[INTEREST-EXPENSE] 2,633,226
[GROSS-EXPENSE] 6,994,878
[AVERAGE-NET-ASSETS] 485,008,754
[PER-SHARE-NAV-BEGIN] 9.17
[PER-SHARE-NII] 0.67
[PER-SHARE-GAIN-APPREC] 0.62
[PER-SHARE-DIVIDEND] (0.69)
[PER-SHARE-DISTRIBUTIONS] (0.69)
[RETURNS-OF-CAPITAL] 13.09
[PER-SHARE-NAV-END] 9.77
[EXPENSE-RATIO] 0.94
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 2
<NAME> GOVERNMENT SECURITIES FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 753,708,213
[INVESTMENTS-AT-VALUE] 779,307,991
[RECEIVABLES] 118,098,453
[ASSETS-OTHER] 340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 897,406,787
[PAYABLE-FOR-SECURITIES] 152,765,525
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 133,163,872
[TOTAL-LIABILITIES] 285,929,397
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 804,536,758
[SHARES-COMMON-STOCK] 46,316,287
[SHARES-COMMON-PRIOR] 52,579,944
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (945,370)
[ACCUMULATED-NET-GAINS] (217,713,779)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25,599,781
[NET-ASSETS] 611,477,390
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 52,587,757
[OTHER-INCOME] (2,633,226)
[EXPENSES-NET] (6,994,878)
[NET-INVESTMENT-INCOME] 42,959,653
[REALIZED-GAINS-CURRENT] 12,784,089
[APPREC-INCREASE-CURRENT] 29,027,947
[NET-CHANGE-FROM-OPS] 84,771,689
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 33,440,120
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 695,391
[NUMBER-OF-SHARES-REDEEMED] 9,230,741
[SHARES-REINVESTED] 2,271,693
[NET-CHANGE-IN-ASSETS] (44,278,335)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,594,874
[INTEREST-EXPENSE] 2,633,226
[GROSS-EXPENSE] 6,994,878
[AVERAGE-NET-ASSETS] 485,008,754
[PER-SHARE-NAV-BEGIN] 9.17
[PER-SHARE-NII] 0.67
[PER-SHARE-GAIN-APPREC] 0.62
[PER-SHARE-DIVIDEND] (0.69)
[PER-SHARE-DISTRIBUTIONS] (0.69)
[RETURNS-OF-CAPITAL] 13.09
[PER-SHARE-NAV-END] 9.77
[EXPENSE-RATIO] 0.94
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 2
<NAME> GOVERNMENT SECURITIES FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 753,708,213
[INVESTMENTS-AT-VALUE] 779,307,991
[RECEIVABLES] 118,098,453
[ASSETS-OTHER] 340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 897,406,787
[PAYABLE-FOR-SECURITIES] 152,765,525
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 133,163,872
[TOTAL-LIABILITIES] 285,929,397
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 804,536,758
[SHARES-COMMON-STOCK] 16,115,757
[SHARES-COMMON-PRIOR] 18,824,589
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (945,370)
[ACCUMULATED-NET-GAINS] (217,713,779)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25,599,781
[NET-ASSETS] 611,477,390
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 52,587,757
[OTHER-INCOME] (2,633,226)
[EXPENSES-NET] (6,994,878)
[NET-INVESTMENT-INCOME] 42,959,653
[REALIZED-GAINS-CURRENT] 12,784,089
[APPREC-INCREASE-CURRENT] 29,027,947
[NET-CHANGE-FROM-OPS] 84,771,689
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 10,410,611
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,925,940
[NUMBER-OF-SHARES-REDEEMED] 5,409,406
[SHARES-REINVESTED] 774,634
[NET-CHANGE-IN-ASSETS] (44,278,335)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,594,874
[INTEREST-EXPENSE] 2,633,226
[GROSS-EXPENSE] 6,994,878
[AVERAGE-NET-ASSETS] 167,773,547
[PER-SHARE-NAV-BEGIN] 9.17
[PER-SHARE-NII] 0.59
[PER-SHARE-GAIN-APPREC] 0.65
[PER-SHARE-DIVIDEND] (0.60)
[PER-SHARE-DISTRIBUTIONS] (0.60)
[RETURNS-OF-CAPITAL] 12.98
[PER-SHARE-NAV-END] 9.81
[EXPENSE-RATIO] 1.45
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 2
<NAME> GOVERNMENT SECURITIES FUND - CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 753,708,213
[INVESTMENTS-AT-VALUE] 779,307,991
[RECEIVABLES] 118,098,453
[ASSETS-OTHER] 340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 897,406,787
[PAYABLE-FOR-SECURITIES] 152,765,525
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 133,163,872
[TOTAL-LIABILITIES] 285,929,397
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 804,536,758
[SHARES-COMMON-STOCK] 105,691
[SHARES-COMMON-PRIOR] 70,470
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (945,370)
[ACCUMULATED-NET-GAINS] (217,713,779)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25,599,781
[NET-ASSETS] 611,477,390
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 52,587,757
[OTHER-INCOME] (2,633,226)
[EXPENSES-NET] (6,994,878)
[NET-INVESTMENT-INCOME] 42,959,653
[REALIZED-GAINS-CURRENT] 12,784,089
[APPREC-INCREASE-CURRENT] 29,027,947
[NET-CHANGE-FROM-OPS] 84,771,689
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 54,292
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 62,023
[NUMBER-OF-SHARES-REDEEMED] 31,879
[SHARES-REINVESTED] 5,077
[NET-CHANGE-IN-ASSETS] (44,278,335)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,594,874
[INTEREST-EXPENSE] 2,633,226
[GROSS-EXPENSE] 6,994,878
[AVERAGE-NET-ASSETS] 831,255
[PER-SHARE-NAV-BEGIN] 9.17
[PER-SHARE-NII] 0.60
[PER-SHARE-GAIN-APPREC] 0.65
[PER-SHARE-DIVIDEND] (0.61)
[PER-SHARE-DISTRIBUTIONS] (0.61)
[RETURNS-OF-CAPITAL] 12.98
[PER-SHARE-NAV-END] 9.81
[EXPENSE-RATIO] 1.37
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 1
<NAME> INVESTMENT GRADE BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 451,582,769
[INVESTMENTS-AT-VALUE] 511,694,750
[RECEIVABLES] 10,769,879
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 664
[TOTAL-ASSETS] 522,465,293
[PAYABLE-FOR-SECURITIES] 292,652
[SENIOR-LONG-TERM-DEBT] 3,497,562
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 3,790,214
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 39,146
[SHARES-COMMON-STOCK] 17,084,579
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (2,108,093)
[ACCUMULATED-NET-GAINS] (1,660,874)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 61,135,731
[NET-ASSETS] 518,675,079
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 36,631,716
[OTHER-INCOME] 0
[EXPENSES-NET] 6,252,382
[NET-INVESTMENT-INCOME] 36,379,334
[REALIZED-GAINS-CURRENT] 5,326,832
[APPREC-INCREASE-CURRENT] 102,665,123
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 14,863,466
[DISTRIBUTIONS-OF-GAINS] 1,520,045
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,770,474
[NUMBER-OF-SHARES-REDEEMED] 2,523,526
[SHARES-REINVESTED] 910,283
[NET-CHANGE-IN-ASSETS] 116,246,133
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (11,316,480)
[GROSS-ADVISORY-FEES] 2,067,222
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 198,469,353
[PER-SHARE-NAV-BEGIN] 10.67
[PER-SHARE-NII] 0.83
[PER-SHARE-GAIN-APPREC] 2.80
[PER-SHARE-DIVIDEND] 0.89
[PER-SHARE-DISTRIBUTIONS] (1.05)
[RETURNS-OF-CAPITAL] 35.29
[PER-SHARE-NAV-END] 13.25
[EXPENSE-RATIO] 1.11
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 1
<NAME> INVESTMENT GRADE BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 451,582,769
[INVESTMENTS-AT-VALUE] 511,694,750
[RECEIVABLES] 10,769,879
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 664
[TOTAL-ASSETS] 522,465,293
[PAYABLE-FOR-SECURITIES] 292,652
[SENIOR-LONG-TERM-DEBT] 3,497,562
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 3,790,214
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 39,146
[SHARES-COMMON-STOCK] 21,776,728
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (2,108,093)
[ACCUMULATED-NET-GAINS] (1,660,874)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 61,135,731
[NET-ASSETS] 518,675,079
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 36,631,716
[OTHER-INCOME] 0
[EXPENSES-NET] 6,252,382
[NET-INVESTMENT-INCOME] 36,379,334
[REALIZED-GAINS-CURRENT] 5,326,832
[APPREC-INCREASE-CURRENT] 102,665,123
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 19,173,040
[DISTRIBUTIONS-OF-GAINS] 75,634,724
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5,517,802
[NUMBER-OF-SHARES-REDEEMED] 5,346,794
[SHARES-REINVESTED] 954,945
[NET-CHANGE-IN-ASSETS] 116,246,133
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (11,316,480)
[GROSS-ADVISORY-FEES] 2,067,222
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 250,722,703
[PER-SHARE-NAV-BEGIN] 10.67
[PER-SHARE-NII] 0.77
[PER-SHARE-GAIN-APPREC] 2.80
[PER-SHARE-DIVIDEND] 0.83
[PER-SHARE-DISTRIBUTIONS] (0.99)
[RETURNS-OF-CAPITAL] 34.63
[PER-SHARE-NAV-END] 13.25
[EXPENSE-RATIO] 1.61
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 1
<NAME> INVESTMENT GRADE BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 451,582,769
[INVESTMENTS-AT-VALUE] 511,694,750
[RECEIVABLES] 10,769,879
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 664
[TOTAL-ASSETS] 522,465,293
[PAYABLE-FOR-SECURITIES] 292,652
[SENIOR-LONG-TERM-DEBT] 3,497,562
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 3,790,214
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 39,146
[SHARES-COMMON-STOCK] 284,247
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (2,108,093)
[ACCUMULATED-NET-GAINS] (1,660,874)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 61,135,731
[NET-ASSETS] 518,675,079
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 36,631,716
[OTHER-INCOME] 0
[EXPENSES-NET] 6,252,382
[NET-INVESTMENT-INCOME] 36,379,334
[REALIZED-GAINS-CURRENT] 5,326,832
[APPREC-INCREASE-CURRENT] 102,665,123
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 138,159
[DISTRIBUTIONS-OF-GAINS] 991,606
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 285,851
[NUMBER-OF-SHARES-REDEEMED] 101,992
[SHARES-REINVESTED] 7,683
[NET-CHANGE-IN-ASSETS] 116,246,133
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] (11,316,480)
[GROSS-ADVISORY-FEES] 2,067,222
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 1,974,463
[PER-SHARE-NAV-BEGIN] 10.67
[PER-SHARE-NII] 0.78
[PER-SHARE-GAIN-APPREC] 2.80
[PER-SHARE-DIVIDEND] 0.83
[PER-SHARE-DISTRIBUTIONS] (0.99)
[RETURNS-OF-CAPITAL] 34.74
[PER-SHARE-NAV-END] 13.26
[EXPENSE-RATIO] 1.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 4
<NAME> MANAGED GROWTH FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 499,271,326
[INVESTMENTS-AT-VALUE] 512,328,778
[RECEIVABLES] 2,057,677
[ASSETS-OTHER] 198,348
[OTHER-ITEMS-ASSETS] 603
[TOTAL-ASSETS] 514,585,406
[PAYABLE-FOR-SECURITIES] 343,750
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,185,113
[TOTAL-LIABILITIES] 1,528,863
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 510,860,398
[SHARES-COMMON-STOCK] 137,489
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 5,290,575
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,093,757
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,057,452
[NET-ASSETS] 513,056,543
[DIVIDEND-INCOME] 2,222,287
[INTEREST-INCOME] 7,084,425
[OTHER-INCOME] 0
[EXPENSES-NET] 4,016,137
[NET-INVESTMENT-INCOME] 5,290,575
[REALIZED-GAINS-CURRENT] (10,963,695)
[APPREC-INCREASE-CURRENT] 13,057,452
[NET-CHANGE-FROM-OPS] 7,384,332
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,031,634
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 13,774,175
[NUMBER-OF-SHARES-REDEEMED] (591,022)
[SHARES-REINVESTED] 162,519
[NET-CHANGE-IN-ASSETS] 513,056,543
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,022,754
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,016,137
[AVERAGE-NET-ASSETS] 147,441,303
[PER-SHARE-NAV-BEGIN] 12.00
[PER-SHARE-NII] 0.16
[PER-SHARE-GAIN-APPREC] 0.02
[PER-SHARE-DIVIDEND] 0.154
[PER-SHARE-DISTRIBUTIONS] 0.15
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.03
[EXPENSE-RATIO] 1.19
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 4
<NAME> MANAGED GROWTH FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 499,271,326
[INVESTMENTS-AT-VALUE] 512,328,778
[RECEIVABLES] 2,057,677
[ASSETS-OTHER] 198,348
[OTHER-ITEMS-ASSETS] 603
[TOTAL-ASSETS] 514,585,406
[PAYABLE-FOR-SECURITIES] 343,750
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,185,113
[TOTAL-LIABILITIES] 1,528,863
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 510,860,398
[SHARES-COMMON-STOCK] 249,906
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 5,290,575
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,093,757
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,057,452
[NET-ASSETS] 513,056,543
[DIVIDEND-INCOME] 2,222,287
[INTEREST-INCOME] 7,084,425
[OTHER-INCOME] 0
[EXPENSES-NET] 4,016,137
[NET-INVESTMENT-INCOME] 5,290,575
[REALIZED-GAINS-CURRENT] (10,963,695)
[APPREC-INCREASE-CURRENT] 13,057,452
[NET-CHANGE-FROM-OPS] 7,384,332
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,697,566
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 25,291,425
[NUMBER-OF-SHARES-REDEEMED] (562,757)
[SHARES-REINVESTED] 219,534
[NET-CHANGE-IN-ASSETS] 513,056,543
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,022,754
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,016,137
[AVERAGE-NET-ASSETS] 276,857,287
[PER-SHARE-NAV-BEGIN] 12.00
[PER-SHARE-NII] 0.11
[PER-SHARE-GAIN-APPREC] 0.02
[PER-SHARE-DIVIDEND] 0.109
[PER-SHARE-DISTRIBUTIONS] 0.11
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.02
[EXPENSE-RATIO] 1.94
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 4
<NAME> MANAGED GROWTH FUND - CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 499,271,326
[INVESTMENTS-AT-VALUE] 512,328,778
[RECEIVABLES] 2,057,677
[ASSETS-OTHER] 198,348
[OTHER-ITEMS-ASSETS] 603
[TOTAL-ASSETS] 514,585,406
[PAYABLE-FOR-SECURITIES] 343,750
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,185,113
[TOTAL-LIABILITIES] 1,528,863
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 510,860,398
[SHARES-COMMON-STOCK] 35,361
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 5,290,575
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,093,757
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,057,452
[NET-ASSETS] 513,056,543
[DIVIDEND-INCOME] 2,222,287
[INTEREST-INCOME] 7,084,425
[OTHER-INCOME] 0
[EXPENSES-NET] 4,016,137
[NET-INVESTMENT-INCOME] 5,290,575
[REALIZED-GAINS-CURRENT] (10,963,695)
[APPREC-INCREASE-CURRENT] 13,057,452
[NET-CHANGE-FROM-OPS] 7,384,332
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 381,955
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3,667,471
[NUMBER-OF-SHARES-REDEEMED] (162,481)
[SHARES-REINVESTED] 31,113
[NET-CHANGE-IN-ASSETS] 513,056,543
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,022,754
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,016,137
[AVERAGE-NET-ASSETS] 38,496,020
[PER-SHARE-NAV-BEGIN] 12.00
[PER-SHARE-NII] 0.11
[PER-SHARE-GAIN-APPREC] 0.03
[PER-SHARE-DIVIDEND] 0.109
[PER-SHARE-DISTRIBUTIONS] 0.11
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.03
[EXPENSE-RATIO] 1.91
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 4
<NAME> MANAGED GROWTH FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 499,271,326
[INVESTMENTS-AT-VALUE] 512,328,778
[RECEIVABLES] 2,057,677
[ASSETS-OTHER] 198,348
[OTHER-ITEMS-ASSETS] 603
[TOTAL-ASSETS] 514,585,406
[PAYABLE-FOR-SECURITIES] 343,750
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,185,113
[TOTAL-LIABILITIES] 1,528,863
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 510,860,398
[SHARES-COMMON-STOCK] 8,345
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 5,290,575
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,093,757
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13,057,452
[NET-ASSETS] 513,056,543
[DIVIDEND-INCOME] 2,222,287
[INTEREST-INCOME] 7,084,425
[OTHER-INCOME] 0
[EXPENSES-NET] 4,016,137
[NET-INVESTMENT-INCOME] 5,290,575
[REALIZED-GAINS-CURRENT] (10,963,695)
[APPREC-INCREASE-CURRENT] 13,057,452
[NET-CHANGE-FROM-OPS] 7,384,332
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 119,697
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 824,984
[NUMBER-OF-SHARES-REDEEMED] (407)
[SHARES-REINVESTED] 9,950
[NET-CHANGE-IN-ASSETS] 513,056,543
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,022,754
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,016,137
[AVERAGE-NET-ASSETS] 6,710,980
[PER-SHARE-NAV-BEGIN] 11.83
[PER-SHARE-NII] 0.04
[PER-SHARE-GAIN-APPREC] 0.32
[PER-SHARE-DIVIDEND] 0.162
[PER-SHARE-DISTRIBUTIONS] 0.16
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.03
[EXPENSE-RATIO] 0.90
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 5
<NAME> SPECIAL EQUITIES FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 214,266,567
[INVESTMENTS-AT-VALUE] 344,191,875
[RECEIVABLES] 5,329,469
[ASSETS-OTHER] 1,067
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 349,522,411
[PAYABLE-FOR-SECURITIES] 2,871,875
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,472,331
[TOTAL-LIABILITIES] 4,344,206
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,932,095
[SHARES-COMMON-STOCK] 5,234,499
[SHARES-COMMON-PRIOR] 5,289,999
[ACCUMULATED-NII-CURRENT] (3,195,629)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 119,990,242
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 129,925,308
[NET-ASSETS] 345,178,205
[DIVIDEND-INCOME] 165,805
[INTEREST-INCOME] 810,146
[OTHER-INCOME] 0
[EXPENSES-NET] 4,171,580
[NET-INVESTMENT-INCOME] (3,195,629)
[REALIZED-GAINS-CURRENT] 21,960,199
[APPREC-INCREASE-CURRENT] 98,030,043
[NET-CHANGE-FROM-OPS] 116,794,613
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 3,547,480
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,906,656
[NUMBER-OF-SHARES-REDEEMED] 7,078,890
[SHARES-REINVESTED] 116,734
[NET-CHANGE-IN-ASSETS] 148,677,575
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 5,309,326
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,276,355
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,717,580
[AVERAGE-NET-ASSETS] 114,764,111
[PER-SHARE-NAV-BEGIN] 19.10
[PER-SHARE-NII] (0.27)
[PER-SHARE-GAIN-APPREC] 12.37
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.76
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 30.44
[EXPENSE-RATIO] 1.43
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 5
<NAME> SPECIAL EQUITIES FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 214,266,567
[INVESTMENTS-AT-VALUE] 344,191,875
[RECEIVABLES] 5,329,469
[ASSETS-OTHER] 1,067
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 349,522,411
[PAYABLE-FOR-SECURITIES] 2,871,875
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,472,331
[TOTAL-LIABILITIES] 4,344,206
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,932,095
[SHARES-COMMON-STOCK] 5,748,436
[SHARES-COMMON-PRIOR] 4,989,720
[ACCUMULATED-NII-CURRENT] (3,195,629)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 119,990,242
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 129,925,308
[NET-ASSETS] 345,178,205
[DIVIDEND-INCOME] 165,805
[INTEREST-INCOME] 810,146
[OTHER-INCOME] 0
[EXPENSES-NET] 4,171,580
[NET-INVESTMENT-INCOME] (3,195,629)
[REALIZED-GAINS-CURRENT] 21,960,199
[APPREC-INCREASE-CURRENT] 98,030,043
[NET-CHANGE-FROM-OPS] 116,794,613
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 3,804,329
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,715,135
[NUMBER-OF-SHARES-REDEEMED] 2,085,066
[SHARES-REINVESTED] 128,647
[NET-CHANGE-IN-ASSETS] 148,677,575
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 5,309,326
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,276,355
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,717,580
[AVERAGE-NET-ASSETS] 113,591,098
[PER-SHARE-NAV-BEGIN] 18.82
[PER-SHARE-NII] (0.37)
[PER-SHARE-GAIN-APPREC] 12.07
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.76
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 29.76
[EXPENSE-RATIO] 2.04
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 5
<NAME> SPECIAL EQUITIES FUND - CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 214,266,567
[INVESTMENTS-AT-VALUE] 344,191,875
[RECEIVABLES] 5,329,469
[ASSETS-OTHER] 1,067
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 349,522,411
[PAYABLE-FOR-SECURITIES] 2,871,875
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,472,331
[TOTAL-LIABILITIES] 4,344,206
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,932,095
[SHARES-COMMON-STOCK] 316,409
[SHARES-COMMON-PRIOR] 81,175
[ACCUMULATED-NII-CURRENT] (3,195,629)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 119,990,242
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 129,925,308
[NET-ASSETS] 345,178,205
[DIVIDEND-INCOME] 165,805
[INTEREST-INCOME] 810,146
[OTHER-INCOME] 0
[EXPENSES-NET] 4,171,580
[NET-INVESTMENT-INCOME] (3,195,629)
[REALIZED-GAINS-CURRENT] 21,960,199
[APPREC-INCREASE-CURRENT] 98,030,043
[NET-CHANGE-FROM-OPS] 116,794,613
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 153,441
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 296,498
[NUMBER-OF-SHARES-REDEEMED] 66,546
[SHARES-REINVESTED] 5,282
[NET-CHANGE-IN-ASSETS] 148,677,575
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 5,309,326
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,276,355
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,717,580
[AVERAGE-NET-ASSETS] 3,470,206
[PER-SHARE-NAV-BEGIN] 18.82
[PER-SHARE-NII] (0.42)
[PER-SHARE-GAIN-APPREC] 12.13
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.76
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 29.77
[EXPENSE-RATIO] 2.25
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK> 0000355747
<NAME> SMITH BARNEY INVESTMENT FUNDS INC
<SERIES>
[NUMBER] 5
<NAME> SPECIAL EQUITIES FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
[INVESTMENTS-AT-COST] 214,266,567
[INVESTMENTS-AT-VALUE] 344,191,875
[RECEIVABLES] 5,329,469
[ASSETS-OTHER] 1,067
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 349,522,411
[PAYABLE-FOR-SECURITIES] 2,871,875
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,472,331
[TOTAL-LIABILITIES] 4,344,206
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,932,095
[SHARES-COMMON-STOCK] 176,117
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] (3,195,629)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 119,990,242
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 129,925,308
[NET-ASSETS] 345,178,205
[DIVIDEND-INCOME] 165,805
[INTEREST-INCOME] 810,146
[OTHER-INCOME] 0
[EXPENSES-NET] 4,171,580
[NET-INVESTMENT-INCOME] (3,195,629)
[REALIZED-GAINS-CURRENT] 21,960,199
[APPREC-INCREASE-CURRENT] 98,030,043
[NET-CHANGE-FROM-OPS] 116,794,613
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 87,560
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 173,310
[NUMBER-OF-SHARES-REDEEMED] 179
[SHARES-REINVESTED] 2,986
[NET-CHANGE-IN-ASSETS] 148,677,575
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 5,309,326
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,276,355
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,717,580
[AVERAGE-NET-ASSETS] 3,588,695
[PER-SHARE-NAV-BEGIN] 26.49
[PER-SHARE-NII] (0.06)
[PER-SHARE-GAIN-APPREC] 4.79
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0.76
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 30.46
[EXPENSE-RATIO] 1.10
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
