As filed with the Securities and Exchange Commission on April 29, 1997
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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.44
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940, as
amended
Amendment No. 46 [ 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:
(800)-451-2010
Christina T. Sydor
Secretary
SMITH BARNEY INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485(b)
XXX__on April 30, 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, 1996 was filed on February 27, 1997 as accession
number 0000091155-97-000104.
To Register Additional Securities under Reg. 270.24e-2
Title of Share
securities Amount
being being
registered registered
Government
Securities
Fund 3,531,442
During its fiscal year ended December 31, 1996, the Government Securities Fund
redeemed 13,449,734 shares.
During its current fiscal year, the fund used 9,918,292 shares it redeemed
during its fiscal year ended December 31, 1996, for a reduction pursuant to
Rule 24f-2(c).
The fund currently is registering 3,531,442 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
Government
Securities
Fund
APRIL 30, 1997
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Smith Barney
Government
Securities
Fund
388 Greenwich Street
New York, New York 10013
FD 0234 4/97
<PAGE>
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Prospectus April 30, 1997
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Smith Barney Government Securities Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 30, 1997, 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
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 11
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Investment Objective and Management Policies 16
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Valuation of Shares 23
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Dividends, Distributions and Taxes 24
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Purchase of Shares 25
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Exchange Privilege 35
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Redemption of Shares 38
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Minimum Account Size 41
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Performance 41
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Management of the Company and the Fund 42
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Distributor 43
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Additional Information 44
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================================================================================
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
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Prospectus Summary
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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 of $500,000
or more 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 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.
3
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Prospectus Summary (continued)
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Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund 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>
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Prospectus Summary (continued)
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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.
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 of $500,000 or more 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 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 different Classes 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) and ExecChoice(TM) Programs 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these Programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
5
<PAGE>
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Prospectus Summary (continued)
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Purchase of Shares Shares may be purchased through a brokerage account
maintained at Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investor Services Group, Inc. ("First Data").
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 investment requirements for purchases of
Fund shares through the Systematic Investment Plan are described below. 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. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $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 engaged, through
its subsidiaries, principally in four business segments: Investment
6
<PAGE>
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Prospectus Summary (continued)
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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 at the respective
net asset values next determined. 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
monthly and paid on the last Friday of the 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>
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Prospectus Summary (continued)
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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 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
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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 0.13 0.15 0.13 0.04
- -----------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.93% 1.45% 1.38% 0.59%
=========================================================================================
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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.
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
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)
and ExecChoice(TM) Programs. 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.
8
<PAGE>
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Prospectus Summary (continued)
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For Class C shares, Smith Barney receives an annual 12b-1 fee of 0.70% of the
value of average daily net assets of this Class, consisting of a 0.45%
distribution fee and a 0.25% service fee."Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Company and the Fund."
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each
time period:
Class A $54 $73 $94 $154
Class B 60 76 89 159
Class C 24 44 76 166
Class Y 6 19 33 74
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A 54 73 94 154
Class B 15 46 79 159
Class C 14 44 76 166
Class Y 6 19 33 74
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</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
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(This page intentionally left blank.)
10
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Financial Highlights
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The following information for the two year period ended December 31, 1996
has been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The
following information for the fiscal years ended December 31, 1987 through
December 31, 1994 has been audited by other independent 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 of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1996 1995(1) 1994 1993(1) 1992(2)
====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.77 $ 9.17 $10.01 $ 9.69 $ 9.56
- ----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.61 0.67 0.52 0.81 0.10
Net realized and unrealized gain (loss) (0.44) 0.62 (0.80) 0.23 0.13
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Total Income (Loss) From Operations 0.17 1.29 (0.28) 1.04 0.23
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Less Distributions From:
Net investment income (0.59) (0.69) (0.49) (0.72) (0.08)
Capital (0.01) -- (0.07) -- (0.02)
- ----------------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.69) (0.56) (0.72) (0.10)
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Net Asset Value, End of Year $ 9.34 $ 9.77 $ 9.17 $10.01 $ 9.69
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Total Return++ 1.96% 14.50% (2.76)% 10.87% 2.41%++
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Net Assets, End of Year (millions) $ 389 $ 453 $ 482 $ 7 $ 0.3
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Ratios to Average Net Assets:
Expenses (3) (4) 0.93% 0.94% 1.00% 0.92% 0.68%+
Net investment income 6.16 6.70 6.18 7.76 6.24+
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% 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 had not been 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
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Financial Highlights (continued)
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For a Class B share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993(1) 1992
===============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.81 $ 9.17 $10.01 $ 9.68 $ 9.81
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.56 0.59 0.46 0.73 0.53
Net realized and unrealized
gain/(loss) (0.44) 0.65 (0.78) 0.27 (0.02)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.12 1.24 (0.32) 1.00 0.51
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.60) (0.45) (0.67) (0.53)
Capital (0.01) -- (0.07) -- (0.11)
- -----------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.60) (0.52) (0.67) (0.64)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.38 $ 9.81 $ 9.17 $10.01 $ 9.68
- -----------------------------------------------------------------------------------------------
Total Return+ 1.42% 13.87% (3.25)% 10.45% 5.45%
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 122 $ 159 $ 173 $851.4 $1,047
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) (3) 1.45% 1.45% 1.48% 1.40% 1.45%
Net investment income 5.64 6.19 5.69 7.28 5.47
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% .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) The investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees had not been 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.
12
<PAGE>
------------------------------------------------------------
Financial Highlights (continued)
------------------------------------------------------------
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.11 $ 9.25 $ 8.75 $ 8.90 $10.41
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.70 0.68 0.70 0.75 0.51
Net realized and unrealized
gain/(loss) 0.71 (0.08) 0.53 (0.16) (1.06)
- ---------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.41 0.60 1.23 0.59 (0.55)
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.63) (0.68) (0.70) (0.74) (0.51)
Capital (0.08) (0.06) (0.03) -- --
- ---------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.74) (0.73) (0.74) (0.96)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.81 $ 9.11 $ 9.25 $ 8.75 $ 8.90
- ---------------------------------------------------------------------------------------------
Total Return+ 16.28% 6.99% 14.58% 6.75% (5.27)%
- ---------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,286 $1,521 $2,002 $2,736 $4,384
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) (3) 1.40% 1.43% 1.40% 1.34% 1.64%
Net investment income 6.80 7.60 7.79 8.00 6.44
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 326% 274% 352% 281% 249%
=============================================================================================
</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 had not been 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class C share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993(1)(2)
=========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.81 $ 9.17 $10.01 $ 9.90
- -----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.57 0.60 0.49 0.68
Net realized and unrealized gain (loss) (0.44) 0.65 (0.81) 0.04
- -----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.13 1.25 (0.32) 0.72
- -----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (0.61) (0.45) (0.61)
Capital (0.01) -- (0.07) --
- -----------------------------------------------------------------------------------------
Total Distributions (0.56) (0.61) (0.52) (0.61)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.38 $ 9.81 $ 9.17 $10.01
- -----------------------------------------------------------------------------------------
Total Return++ 1.47% 13.93% (3.25)% 7.36%++
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,443 $1,039 $ 646 $ 213
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) (4) 1.38% 1.37% 1.47% 1.40%+
Net investment loss 5.71 6.27 5.71 7.28+
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% 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 had not been 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class Y share of capital stock outstanding throughout each year:
1996(1)
================================================================================
Net Asset Value, Beginning of Year $ 9.71
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.57
Net realized and unrealized loss (0.37)
- --------------------------------------------------------------------------------
Total Income From Operations 0.20
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56)
Capital (0.01)
- --------------------------------------------------------------------------------
Total Distributions (0.57)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.34
- --------------------------------------------------------------------------------
Total Return++ 2.30%
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 39,667
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.59%*
Net investment income 6.49
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 420%
================================================================================
(1) For the period from February 7, 1996 (inception date) to December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
* Amount has been restated from the Fund's Annual Report dated December 31,
1996.
15
<PAGE>
- --------------------------------------------------------------------------------
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 also invest in real estate investment trusts and purchase
the securities of companies with less than three years of continuous operation.
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.
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
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
Zero Coupon Securities. The Fund may also invest in zero coupon bonds. A
zero coupon bond pays no interest in cash to its holder during its life,
although interest is accrued during that period. Its value to an investor
consists of the difference between its face value at the time of maturity and
the price for which it was acquired, which is generally an amount significantly
less than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make periodic distributions
of interest. On the other hand, because there are no periodic interest payments
to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.
Dollar Roll Transactions. The fund may enter into "dollar rolls," in which
the Fund sells fixed income securities and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During this "roll" period, the Fund would forego
principal and interest paid on such securities. The Fund would be compensated by
the difference between the current sales price and the forward price for the
future purchase, as well as by the interest carried on the cash proceeds of the
initial sale. Since the Fund will receive interest on the securities in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since the proceeds will be invested only in U.S. Treasury obligations
and since the Fund will enter into dollar roll transactions only with dealers of
sufficient creditworthiness in the judgement of the Fund's investment adviser,
such transactions do not present the risks to the Fund that are associated with
other types of leverage. Dollar roll transactions are considered borrowings by
the Fund and will be subject to the Fund's overall borrowing limitation.
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
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
purchaser assumes the risk of any decline in value of the security beginning on
the date of the agreement or purchase. The Fund will not use such transactions
for leveraging purposes, and accordingly will segregate U.S. government
securities, cash or cash equivalents in an amount sufficient to meet its
purchase obligations under the agreement.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and obtain
the return of the securities loaned; (c) the Fund will receive any interest or
dividends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of
the Fund.
Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
Options Activities. The Fund may write (i.e., sell) call options ("calls")
if the calls are "covered" throughout the life of the option. A call is
"covered" if the Fund owns the optioned securities, if the Fund maintains in a
segregated account with the Company's custodian cash, cash equivalents or U.S.
government securities with a value sufficient to meet its obligations 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.
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash, cash equivalents or U.S. government
securities with a value equal to the exercise price in a segregated account or
holds a put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by the
Fund will not exceed 50% of its net assets. The Fund also writes "straddles,"
which are combinations of secured puts and covered calls on the same underlying
security.
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the premium,
plus commission costs, paid to purchase the call or put is less (or greater)
than the premium, less commission costs, received on the sale of the call or
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.
Swap Agreements. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount for a specified period of
time. If a swap agreement provides for payments in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
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
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
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.
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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, 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
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and
selects brokers and dealers (including Smith Barney) which, in its best
judgment, provide prompt and reliable execution at favorable prices and
reasonable commission rates. SBMFM may select brokers and dealers which provide
it with research services and may cause the Fund to pay such brokers and dealers
commissions which exceed those other brokers and dealers may have charged, if it
views the commissions as reasonable in relation to the value of the brokerage
and/or research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the Fund's securities, with money
market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for each
of the past fiscal years are set forth under "Financial Highlights."
- --------------------------------------------------------------------------------
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.
23
<PAGE>
- --------------------------------------------------------------------------------
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 and pays dividends monthly consisting of estimated daily
net investment income. 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 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.
24
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital gains dividends are taxable to shareholders as
long-term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
Dividends (including capital gains dividends) declared by the Fund in
October, November or December of any calendar year to shareholders of record on
a date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from U.S. government securities may be exempt from all
state and local income taxes. Shareholders should consult their tax advisors for
specific information on the tax consequences of particular types of
distributions.
- --------------------------------------------------------------------------------
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 CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
by Smith Barney Concert Allocation 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.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase shares
directly through First Data. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A, Class B, Class C or Class Y shares.
Smith Barney and other broker/dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.
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 shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, 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 or Trustees of any of the Smith
Barney Mutual Funds 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 First Data. Share certificates are issued only
upon a shareholder's written request to First Data.
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
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
received by the Fund or 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 First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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 First Data.
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:
Sales Sales Dealer's
Charge as % Charge as % Reallowance as %
Amount of Investment of Offering Priceof Amount Invested of Offering Price
================================================================================
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 * * *
================================================================================
* Purchases of Class A shares of $500,000 or more 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 and his or her immediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); 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 to effect 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) purchases by 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, and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of Travelers or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note:
subsequent investments will be subject to the applicable sales charge); (g)
purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and (h) purchases by investors participating in a Smith
Barney fee-based arrangement. 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. 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
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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, 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.
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data 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 First Data 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 that were purchased without an initial
sales charge but subject to a CDSC.
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
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares --Smith Barney 401(k) and ExecChoice(TM) Programs."
Year Since Purchase
Payment Was Made CDSC
================================================================================
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 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 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. 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
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect 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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
SMITH BARNEY 401(k) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class C shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class C shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. Once a Participating Plan has made an initial
investment in the
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at
the end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five-year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans will
be notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for the
five-year exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the Participating Plan
qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A shares
of 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.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class C shares for Class A shares of the Fund regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program. Such Plans will be notified of the
pending exchange in writing approximately 60 days before the eighth anniversary
of the enrollment date and, unless the exchange has been rejected in writing,
the exchange will occur on or about the eighth anniversary date. Once an
exchange has occurred, a Participating
33
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Plan will not be eligible to acquire additional Class C shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class C shares not converted
will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Fund are not available for purchase by Participating Plans opened on or after
June 21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, the Participating Plan will be
offered the opportunity to exchange all of its Class B shares for Class A shares
of the Fund. Such Participating Plan 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."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased more
than eight years prior to the redemption, plus increases in the net asset value
of the shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
34
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
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
Growth and Income Funds
Concert Social Awareness Fund
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 Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ 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.
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York 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 Allocation Series
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
36
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 and Class B 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, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares may exchange Fund shares for Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
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.
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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective class 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, the Fund may at
its discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund 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
37
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. 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 business 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
written request to a Smith Barney Financial Consultant. Shares other than those
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 5128
Westborough, Massachusetts 01581-5128
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 First Data together with the redemption request. Any
signature appearing on a share certificate stock power or redemption request in
excess of $2,000 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. First Data 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 First Data
receives all required documents in proper form.
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
First Data 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 First Data 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 First Data
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.
39
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data 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.
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.
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 information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
40
<PAGE>
- --------------------------------------------------------------------------------
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
the 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 involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the
41
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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.
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
February 28, 1997 in excess of $80 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, 1996, SBMFM was paid investment advisory fees equal to 0.35% of the value of
the Fund's average daily net assets.
42
<PAGE>
- --------------------------------------------------------------------------------
Management of the Company and the Fund (continued)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
James E. Conroy, Managing Director of SBMFM, has served as 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, 1996 is included in
the Fund's Annual Report dated December 31, 1996. 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.
- --------------------------------------------------------------------------------
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 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.
43
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
First Data 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
44
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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. Shareholders who do not want this consolidation to
apply to their account should contact their Smith Barney Financial Consultants
or First Data.
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Smith Barney
Government
Securities
Fund
388 Greenwich Street
New York, New York 10013
FD 0234 4/97
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Growth
Opportunity
Fund
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
April 30, 1997
Smith Barney
Growth Opportunity Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Smith Barney Growth Opportunity Fund (the "Fund") seeks capital apprecia-
tion through investments in securities believed to have above average poten-
tial 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 30, 1997, 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
- -------------------------------------------------
VALUATION OF SHARES 17
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 17
- -------------------------------------------------
PURCHASE OF SHARES 19
- -------------------------------------------------
EXCHANGE PRIVILEGE 29
- -------------------------------------------------
REDEMPTION OF SHARES 32
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 34
- -------------------------------------------------
PERFORMANCE 35
- -------------------------------------------------
MANAGEMENT OF THE FUND 35
- -------------------------------------------------
DISTRIBUTOR 36
- -------------------------------------------------
ADDITIONAL INFORMATION 37
- -------------------------------------------------
</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>
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 apprecia-
tion. 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. 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 of
$500,000 or more, 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 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
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They bear an annual service fee of 0.25% and an annual distribu-
tion 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 pur-
chase. 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 Fund 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 serv-
ice or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider 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 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 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.
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.
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 of $500,000 or more 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 investment may be met by adding the
purchase to the net asset value
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
of all Class A shares held in funds sponsored by Smith Barney Inc. ("Smith Bar-
ney") 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 different Classes of shares. Investors should understand that the pur-
pose 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.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained at Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investor Services Group, Inc. ("First Data").
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
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment requirement for pur-
chases of the Fund shares through the Systematic Investment Plan is described
below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirements for all classes for shareholders purchasing shares through
the Systematic Investment Plan on a monthly basis is $25 and on a quarterly
basis is $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 at the respec-
tive net asset values next determined. 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 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
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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."
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>
GROWTH OPPORTUNITY FUND 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 1.00% 1.00% 1.00% 1.00%
12b-1 Fees** 0.25 1.00 1.00 None
Other Expenses*** 0.53 0.53 0.40 0.53
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.78% 2.53% 2.40% 1.57%
</TABLE>
- -------------------------------------------------------------------------------
* Purchases of Class A shares of $500,000 or more, 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 of purchase.
** 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" are estimated based on expenses
incurred by Class A shares because there were no Class Y shares
outstanding during the fiscal year ended December 31, 1996.
Class A shares of the Fund purchased through Smith Barney AssetOne Program
will be subject to an annual asset-based fee, payable quarterly, in lieu of
the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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)
and ExecChoice(TM) Programs. 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 the respective Classes, 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
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>
GROWTH OPPORTUNITY FUND 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 $103 $142 $249
Class B.................................. $76 $109 $145 $269
Class C.................................. $34 $ 75 $128 $274
Class Y.................................. $15 $ 46 $ 80 $176
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. $67 $103 $142 $249
Class B.................................. $26 $ 79 $135 $269
Class C.................................. $24 $ 75 $128 $274
Class Y.................................. $15 $ 46 $ 80 $176
- ------------------------------------------------------------------------------
</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 REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN ABOVE.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two years ended December 31, 1996 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated December 31, 1996. 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 to Shareholders,
which is incorporated by reference into the Statement of Additional Informa-
tion. 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>
GROWTH OPPORTUNITY FUND 1996 1995(1)
- ---------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.31 $13.36
- ---------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.01 0.03
Net realized and unrealized gain 1.85 1.87
- ---------------------------------------------------------
Total Income From Operations 1.86 1.90
- ---------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02)
In excess of net investment income (0.11) --
Net realized gains (2.26) (0.93)
- ---------------------------------------------------------
Total Distributions (2.37) (0.95)
- ---------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.80 $14.31
- ---------------------------------------------------------
TOTAL RETURN 13.96% 14.61%++
- ---------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $72,180 $57,693
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.78% 1.72%+
Net investment income (loss) 0.13 0.46
- ---------------------------------------------------------
PORTFOLIO TURNOVER RATE 183% 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 applicable sales
charge.
+ Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
GROWTH OPPORTUNITY FUND 1996 1995(1)
- ---------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.27 $13.36
- ---------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.09) (0.02)
Net realized and unrealized gain 1.84 1.86
- ---------------------------------------------------------
Total Income From Operations 1.75 1.84
- ---------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- --
In excess of net investment income (0.02) --
Net realized gains (2.26) (0.93)
- ---------------------------------------------------------
Total Distributions (2.28) (0.93)
- ---------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.74 $14.27
- ---------------------------------------------------------
TOTAL RETURN 13.12% 14.15%++
- ---------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $43,148 $32,685
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.53% 2.46%+
Net investment income (loss) (0.63) (0.27)+
- ---------------------------------------------------------
PORTFOLIO TURNOVER RATE 183% 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 applicable sales
charge.
+ Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
GROWTH OPPORTUNITY FUND 1996 1995(1)
- -------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.29 $14.05
- -------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.08) 0.01
Net realized and unrealized gain 1.85 1.16
- -------------------------------------------------------
Total Income From Operations 1.77 1.17
- -------------------------------------------------------
LESS DISTRIBUTIONS FROM:
In excess of net investment income (0.02) --
Net realized gains (2.26) (0.93)
- -------------------------------------------------------
Total Distributions (2.28) (0.93)
- -------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.78 $14.29
- -------------------------------------------------------
TOTAL RETURN 13.24% 8.69%++
- -------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $174 $88
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.40% 2.29%+
Net investment income (loss) (0.48) 0.13+
- -------------------------------------------------------
PORTFOLIO TURNOVER RATE 183% 51%
- -------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06
- -------------------------------------------------------
</TABLE>
(1) For the period from August 8, 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 applicable sales
charge.
+ Annualized.
11
<PAGE>
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 SBMFM uses a flexible man-
agement 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 the SBMFM for temporary defensive purpos-
es. 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, small capitalized companies may be subject to a limited liquidity
and more volatility which could result in significant fluctuations in the price
of their shares.
The Fund may also invest in money market instruments, enter into repurchase
agreements and reverse repurchase agreements for temporary defensive purposes,
lend its portfolio securities, invest in real estate investment trusts, sell
securities short "against the box", purchase the securities of companies with
less than three years of continuous operation, 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 "Invest-
ment Restric-
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tions" 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 fundamen-
tal, 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
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, 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 (including interest rate and currency swaps, caps, collars and
floors), futures contracts and options thereon in several different ways,
depending upon the status of the Fund's portfolio and the 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 in managing the Fund's investments,
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
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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, purchase or sell futures contracts or related options for
which the aggregate initial 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, debt
securities of any grade or equity securities having a value equal to or greater
than 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, provided such securities have been determined by SBMFM to be
liquid and unencumbered, and are marked to market daily, pursuant to guidelines
established by the Directors. 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 contracts and related
options, is contained in the Statement of Additional Information.
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 government, 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 certain countries, there is the possi-
bility of expropriation of assets, repatriation, confiscatory taxation, politi-
cal 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 company
than about a U.S. company and foreign companies may not be subject to account-
ing, 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
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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. dol-
lar 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 fluctuations in the price of portfolio securities or prevent losses
if the prices of such securities decline. Furthermore, such hedging transac-
tions reduce or preclude the opportunity for gain if the value of the
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 trans-
actions occur when securities are purchased or sold by the Fund with payment
and delivery taking place in the future (a month or more after such transac-
tions). The price is fixed on the date of the commitment and the seller contin-
ues 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 securities may be more or less than the purchase or sale price.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities or cash or cash equivalents maintained on a daily marked-
to-market basis in an amount at least equal to the current market value of the
securities loaned; (b) the Fund may at any time call the loan and obtain the
return of the securities loaned; (c) the Fund will receive any 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 and Illiquid Securities. The Fund may invest in restricted securi-
ties. 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 sale would otherwise be desirable.
Restricted securities and securities 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.
Borrowing. The Fund may borrow money from banks temporarily for emergency
purposes in an amount not exceeding 33 1/3% 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 nor-
mally will be less than 100%. The Fund's portfolio turnover rate is calculated
by dividing the
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
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 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 deter-
mined by consideration of other factors by or under the direction of the Board
of Directors. Over-the-counter securities are valued on the basis of the bid
price at the close of business on each day. Unlisted foreign securities are
valued at the mean between the last available bid and offer price prior to the
time of valuation. Any assets or liabilities initially expressed in terms of
foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund'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.
17
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 4.00% 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.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund 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 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 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.
18
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 advi-
sors 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 redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. In addition, certain investors, including qualified retirement plans and
certain other institutional investors, may purchase shares directly through
First Data. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B, Class C or Class Y shares. Smith Barney
and other broker/dealers may charge their customers an annual account mainte-
nance fee in connection with a brokerage account through which an investor pur-
chases or holds shares. Accounts held directly at First Data are not subject to
a maintenance fee.
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 shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment require-
ment for all Classes is $25. For shareholders purchasing shares of the Fund
through the Systematic Invest -
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
ment Plan on a quarterly basis, 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 Bar-
ney, Directors or Trustees of any of the Smith Barney Mutual Funds 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 Fund's transfer agent, First Data. Share certificates are issued
only upon a shareholder's written request to First Data.
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 First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder'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 First Data. 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.
20
<PAGE>
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 of $500,000 or more, 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 who receive at least 90% of the sales charge
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, and his or her immediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.
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) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired board members and employees); the immediate families
of such persons (including the surviving spouse of a deceased board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securi-
ties Dealers, Inc., provided such sales are made upon the assurance of the
purchaser that the purchase is made for investment purposes and that the secu-
rities will not be resold except through redemption or repurchase; (b) offers
of Class A shares to any other investment company to effect 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
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 pro-
ceeds 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) purchases by
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) and who wish to reinvest their redemption proceeds in the Fund, pro-
vided the reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries
of Travelers; (f) direct rollovers by plan participants of distributions from
a 401(k) plan offered to employees of Travelers or its subsidiaries or a
401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subsequent
investments will be subject to the applicable sales charge); (g) purchasers by
separate accounts used to fund certain unregistered variable annuity con-
tracts; and (h) purchases by investors participating in a Smith Barney fee-
based arrangement. In order to obtain such discounts, the purchaser must pro-
vide 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 that 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 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 require-
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
ments. One such requirement is that the plan must be open to specified part-
ners 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 Section 401 or 408 of the Code. Smith Bar-
ney 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 indi-
vidual 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 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 cri-
teria 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
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 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 Let-
ter 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 First Data to obtain a
Letter of Intent application.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data 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 that were purchased without an initial sales
charge but subject to a CDSC.
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 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
Class B shares held under the Smith Barney 401(k) program as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs:"
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<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 and Thereafter 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 addition, a certain portion of Class B dividend shares will be
converted at that time. See "Prospectus Summary--Alternative Purchase Arrange-
ments--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.
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "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 attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemption of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder 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 First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. 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 sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of 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.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Program,
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of the Fund regardless of asset
size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Program. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class
A shares of the Fund. Any Class C shares not converted will continue to be sub-
ject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing 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 Par-
ticipating 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 Participat-
ing 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 fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made in the purchase
payment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the 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.
28
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below and provided your investment dealer is an
authorized distributor of the fund, 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, 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.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
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 Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++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 Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
29
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York 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 Allocation Concert Series Inc.
Smith Barney Allocation Concert Series Inc.--High Growth Portfolio
Smith Barney Allocation Concert Series Inc.--Growth Portfolio
Smith Barney Allocation Concert Series Inc.--Balanced Portfolio
Smith Barney Allocation Concert Series Inc.--Conservative Portfolio
Smith Barney Allocation 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 and Class B 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, participating plans prior to June 21, 1996 and investing in
Class C shares may exchange Fund shares for Class C shares of this Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class B Exchanges. In the event a Class B shareholder 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 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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class 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 deter-
mine 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 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 and Exchange Program".
Exchanges will be processed at the net asset value next determined. Redemp-
tion 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 identi-
cal to the registration of the shares of the fund exchanged, no signature guar-
antee 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 describ-
ing the shares to be acquired. The Fund reserves the right to modify or discon-
tinue exchange privileges upon 60 days' prior notice to shareholders.
31
<PAGE>
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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 business day following receipt
of proper tender, except on a days on which the NYSE is closed or as permitted
under the 1940 Act, in extraordinary circumstances. Generally, if the redemp-
tion proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Smith Barney will benefit from the use of temporarily uninvested funds.
Redemption proceeds for shares purchased by check, other than a certified or
official bank check, will be remitted upon clearance of the check, which may
take up to ten days or more. Shares held by Smith Barney as custodian must be
redeemed by submitting a written request to a Smith Barney Financial Consul-
tant.
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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Growth Opportunity Fund Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc. P.O. Box 5128 Westborough,
Massachusetts 01581-5128
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. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written
32
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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-period or the
redemption proceeds are to be sent to an address other than the address of the
record. Unless otherwise directed, redemption proceeds will be mailed to an
investor's address on record. First Data may require additional supporting doc-
uments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until First Data 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 First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data 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 First Data 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 request 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 or 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
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 Fed-
eral Reserve System or have a correspondent with a member bank. The Fund
reserves the right to charge shareholders a nominal fee for each wire redemp-
tion. Such charges, if any, will be assessed against the shareholder' 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 shareholders'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 from the of the fund being acquired is identical to the
registration of the shares of the fund exchanged. Such exchange request may be
made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York 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 instructions com-
municated 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 shareholders's name account num-
ber 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 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, 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 involuntary liquidation.
34
<PAGE>
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 Securities and Exchange Commission, is derived from this total return,
which provides the ending redeemable value. Such standard total return informa-
tion may also be accompanied with nonstandard total return information for dif-
fering periods computed in the same manner but without annualizing the total
return or taking sales charges into account. The Fund calculates current divi-
dend return for each Class by annualizing the most recent monthly distribution
and dividing by the net asset value or the maximum public offering price (in-
cluding 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 com-
panies 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.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund'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 the Fund's distributor, investment adviser,
custodian and transfer agent. The day-to-day operations of the Fund are dele-
gated to the Fund's investment manager. The Statement of Additional Information
contains background information regarding each Director of the Fund and execu-
tive officer of the Company.
35
<PAGE>
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 predecessor entities) has been in the investment
counseling business since 1940. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of January 31, 1997, in
excess of $80 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
this fee is higher than that paid by most investment companies, the Fund's man-
agement has determined that it is comparable to the fee charged by other
investment advisers of investment companies that have similar objectives and
policies.
PORTFOLIO MANAGEMENT
Harvey Eisen, Senior Vice President of Investment Operations for Travelers,
serves as Vice President and Investment Officer 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, 1996 is included
in the Annual Report dated December 31, 1996. 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
MANAGEMENT OF THE FUND (CONTINUED)
36
<PAGE>
DISTRIBUTOR (CONTINUED)
1940 Act (the "Plan"), Smith Barney is paid an annual 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 an annual distribution fee with respect to Class B and Class C shares at
the annual rate of 0.75% of the average daily net assets attributable to those
Classes. Class B shares that automatically convert to Class A shares eight
years after the date of original purchase will no longer be subject to distri-
bution 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 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 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 incorporated under the laws of the State of Maryland corpora-
tion 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 shares of common stock currently classified
into four Classes, A, B, C and Y, 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
37
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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 privi-
lege 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,
PA 19103 serves as custodian of the Fund's investments.
First Data 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 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, which include 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 hav-
ing multiple accounts with the identical address of record will receive a sin-
gle copy of each report. Shareholders who do not want this consolidation to
apply to their accounts should contact their Smith Barney Financial Consultant
or the Fund's transfer agent.
----------------------
38
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
GROWTH
OPPORTUNITY
FUND
388 Greenwich Street
New York, New York 10013
FD 0970 4/97
PROSPECTUS April 30, 1997
- --------------------------------------------------------------------------------
Smith Barney Investment Funds Inc.
Growth Opportunity Fund
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 30, 1997, 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 Registered 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.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 8
- --------------------------------------------------
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 22
- --------------------------------------------------
REDEMPTION OF SHARES 23
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 25
- --------------------------------------------------
PERFORMANCE 26
- --------------------------------------------------
MANAGEMENT OF THE FUND 27
- --------------------------------------------------
DISTRIBUTOR 28
- --------------------------------------------------
ADDITIONAL INFORMATION 29
- --------------------------------------------------
</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>
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 Registered
Representatives. These Classes, which are designed to provide them with the
flexibility of selecting an investment best suited to their needs 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 of
$500,000 or more, 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 Summa-
ry--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
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 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 of $500,000 or more, may 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 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 Registered 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
"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
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Subsequent investments of at least $50 may be made for both Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(a) 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 $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 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. ("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 at the respective
net asset values next determined. 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 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
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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."
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>
SMITH BARNEY
GROWTH OPPORTUNITY FUND 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.............................................. 0.53 0.53
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES................................. 1.78% 2.53%
</TABLE>
- -------------------------------------------------------------------------------
* Purchases of Class A shares of $500,000 or more, 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 of purchase.
** 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
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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
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>
SMITH BARNEY
GROWTH OPPORTUNITY FUND 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 $103 $142 $249
Class B..................................... 76 109 145 269
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $67 $103 $142 $249
Class B..................................... 26 79 135 269
- ------------------------------------------------------------------------------
</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 ABOVE.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two years ended December 31, 1996 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated December 31, 1996. 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 to Shareholders,
which is incorporated by reference into the Statement of Additional
Information.
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS:
<TABLE>
<CAPTION>
SMITH BARNEY
GROWTH OPPORTUNITY FUND 1996 1995(1)
- -------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.31 $13.36
- -------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.01 0.03
Net realized and unrealized gain 1.85 1.87
- -------------------------------------------------------
Total Income From Operations 1.86 1.90
- -------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02)
In excess of net investment income (0.11) --
Net realized gains (2.26) (0.93)
- -------------------------------------------------------
Total Distributions (2.37) (0.95)
- -------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.80 $14.31
- -------------------------------------------------------
TOTAL RETURN 13.96% 14.61%++
- -------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $72,180 $57,693
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.78% 1.72%+
Net investment income (loss) 0.13 0.46 +
- -------------------------------------------------------
PORTFOLIO TURNOVER RATE 183% 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.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS:
<TABLE>
<CAPTION>
SMITH BARNEY
GROWTH OPPORTUNITY FUND 1996 1995(1)
- ---------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.27 $ 13.36
- ---------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.09) (0.02)
Net realized and unrealized gain 1.84 1.86
- ---------------------------------------------------------
Total Income From Operations 1.75 1.84
- ---------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- --
In excess of net investment income (0.02) --
Net realized gains (2.26) (0.93)
- ---------------------------------------------------------
Total Distributions (2.28) (0.93)
- ---------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 13.74 $ 14.27
- ---------------------------------------------------------
TOTAL RETURN++ 13.12% 14.15%++
- ---------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $43,148 $32,685
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.53% 2.46%+
Net investment income (loss) (0.63) (0.27)+
- ---------------------------------------------------------
PORTFOLIO TURNOVER RATE 183% 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>
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 SBMFM uses a flexible man-
agement 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 manage-
ment 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 deriva-
tives 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 manage-
ment. In addition, smaller capitalized companies may be subject to a limited
liquidity and more volatility which could result in significant fluctuations
in the price of their shares.
The Fund may also invest in money market instruments, enter into repurchase
agreements and reverse repurchase agreements for temporary defensive purposes,
lend its portfolio securities, invest in real estate investment trusts, sell
securities short "against the box", purchase the securities of companies with
less than three years of continuous operation, and enter into forward con-
tracts.
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 (including interest rate and currency swaps, caps, collars and floors),
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 securi-
ties. 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 investments. The Fund may
write or purchase options in privately negotiated transactions ("OTC Options")
as well as listed options. OTC
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Options can be closed out only by agreement with the other party to the trans-
action. 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 write
or purchase options, purchase or sell futures contracts or related options for
which the aggregate initial 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, debt
securities of any grade, or equity securities having a value equal to or
greater than 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, provided such securities have been determined by
SBMFM to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Directors. 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 contracts and
related options, is contained in the Statement of Additional Information.
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 certain countries, there is the possi-
bility of expropriation of assets, repatriation, confiscatory taxation, politi-
cal 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 company
than about a U.S. company and foreign companies may not be subject to account-
ing, auditing and financial reporting standards comparable to those of U.S.
companies.
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may also purchase foreign securities in the form of American Deposi-
tary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other secu-
rities representing underlying shares of foreign companies. ADRs are publicly
traded on exchanges or over-the-counter in the United States and are issued
through "sponsored" or "unsponsored" arrangements. In a sponsored ADR arrange-
ment, 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 purchases
and sells foreign currency on a spot basis in connection with the settlement 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 brokers
and dealers in which the Fund purchases or sells foreign currencies at a future
date ("futures contracts") and purchase and sell foreign currency futures con-
tracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time
at 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
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude 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 and Illiquid Securities. The Fund may invest in restricted securi-
ties. 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 sale would otherwise be desirable.
Restricted securities and securities 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.
Borrowing. The Fund may borrow money from banks temporarily for emergency
purposes in an amount not exceeding 33 1/3% 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.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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 deter-
mined by consideration of other factors by or under the direction of the Board
of Directors. Over-the-counter securities are valued on the basis of the bid
price at the close of business on each day. Unlisted foreign securities are
valued at the mean between the last available bid and offer price prior to the
time of valuation. Any assets or liabilities initially expressed in terms of
foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
15
<PAGE>
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 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.
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-
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
16
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 Registered Representatives. Class A shares are sold to investors
with an initial 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 consider in selecting which Class of shares to purchase.
Initial purchases of Fund shares must be made through a PFS Investments Reg-
istered Representative 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 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 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. Subsequent investments of at least
$50 may be made for both Classes. For participants in retirement plans quali-
fied under Section 403(b)(7) or Section 401(a) of the Code, the minimum ini-
tial 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 $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
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
reserves the right to waive or change minimums, to decline any order to pur-
chase 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. A shareholder who has insufficient funds to complete
any purchase will be charged a fee of $25 per returned purchase by PFS or the
Sub-Transfer Agent.
Purchase orders received by the Sub-Transfer Agent prior to the close of regu-
lar 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 preau-
thorized transfers of $25 or more to charge the regular bank account or other
financial institution indicated by the shareholder on a monthly basis to pro-
vide 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. A shareholder who places a stop payment
on a transfer or the transfer is returned because the account has been closed
will also be charged a fee of $25 by PFS or the Sub-Transfer Agent.
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
------------------------------
SMITH BARNEY GROWTH DEALERS'
OPPORTUNITY FUND % 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 of $500,000 or more 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 Registered 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."
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 to effect the combination of such company with the Fund by
merger, acquisition of assets or otherwise; (c) purchases by 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) and who
wish to reinvest their redemption proceeds in the Fund, provided the reinvest-
ment is made within 60 calendar days of the redemption; (d) purchases by
accounts managed by registered investment advisory subsidiaries of Travelers;
and (e) sales through PFS Investments Registered Representatives where the
amounts invested represent the redemption proceeds from investment companies
distributed by an entity other than PFS, on the condition that (i) the redemp-
tion 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 Registered 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.
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating 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 execu-
tion 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 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 that were purchased without an initial sales charge but subject
to a CDSC.
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 state-
ment month. The following table sets forth the rates of the charge for redemp-
tions of Class B shares by shareholders.
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<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 and thereafter 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 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
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the value of the shareholder's shares at the time the withdrawal plan com-
mences (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 dis-
tributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemption of shares to effect a combina-
tion 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, rein-
vest 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.
FUND NAME
.Concert Social Awareness Fund
.Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
.Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
.Smith Barney Concert Allocation Series Inc.--Growth Portfolio
.Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
.Smith Barney Concert Allocation 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
22
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 det-
rimental 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
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 Bar-
ney Mutual Funds listed under "Exchange Privilege", which position the share-
holder would be expected to maintain for a significant period of time. All rel-
evant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
Exchanges will be processed at the net asset value next determined. 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 identi-
cal to the registration of the shares of the fund exchanged, no signature guar-
antee 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 describ-
ing the shares to be acquired. The Fund reserves the right to modify or discon-
tinue 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-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.
23
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account registra-
tion. 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 sharehold-
er(s) has had an address change in the past 45 days, or if the shareholder(s)
is a corporation, sole proprietor, partnership, trust or fiduciary, signa-
ture(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 secu-
rities 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 administrator.
Additionally, if a shareholder requests a redemption from a Retirement Plan
account (IRA, SEP or 403(b)(7) ), such request must state whether or not fed-
eral 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.
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.
24
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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.
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
the Fund, each account must satisfy the minimum account size). The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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 involuntary liquidation.
25
<PAGE>
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
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the 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 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.
26
<PAGE>
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 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 dele-
gated to the Fund's investment manager. The Statement of Additional Information
contains background information regarding each Director of the Fund and execu-
tive 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 counsel-
ing business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to investment companies that had aggregate assets under man-
agement as of January 31, 1997, in excess of $80 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 invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
the services rendered, the Fund pays SBMFM a monthly fee at the annual rate of
1.00% 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 deter-
mined 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, Senior Vice President of Investment Operations for Travelers,
serves as Vice President and Investment Officer 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, 1996 is included
in the Annual Report dated December 31, 1996. 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.
27
<PAGE>
DISTRIBUTOR
PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30199-0001. PFS
distributes shares of the Fund as principal underwriter and as such conducts 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 con-
vert 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 Registered Representatives for servicing share-
holder 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 poten-
tial investors; payments to and expenses of Registered 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, util-
ity, communications and sales promotion expenses.
The payments to PFS Investments Registered 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. Registered 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 Securi-
ties Act of 1933. From time to time, PFS or its affiliates may also pay for
certain non-cash sales incentives provided to PFS Investments Registered Repre-
sentatives. 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 promotional incentives, in the form of cash or other compensa-
tion to PFS Investments Registered 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.
28
<PAGE>
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, privileges and pref-
erences, 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 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, Boston,
Massachusetts 02109 and serves as the Fund'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 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, 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
29
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to their accounts should contact their PFS Registered Representative or the
Fund's Sub-Transfer Agent. Also available at the shareholder's request, is an
Account Transcript identifying every financial transaction in an account since
it was opened. To defray administrative expenses involved with providing multi-
ple years worth of information, there is a $15 charge for each Account Tran-
script requested.
Additional copies of tax forms are available at the Shareholder's request. A
$10 charge fee for each tax form will be assessed.
Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 544-5445.
----------------------
30
<PAGE>
SMITH BARNEY
----------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY GROWTH OPPORTUNITY FUND
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
(800) 544-5445
FUND 26
- --------------------------------------------------------------------------------
P R O S P E C T U S
SMITH BARNEY
Managed
Growth
Fund
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS April 30, 1997
Smith Barney
Managed Growth Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 "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 30, 1997, 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- --------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- --------------------------------------------------
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS 14
- --------------------------------------------------
VALUATION OF SHARES 19
- --------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
- --------------------------------------------------
PURCHASE OF SHARES 21
- --------------------------------------------------
EXCHANGE PRIVILEGE 31
- --------------------------------------------------
REDEMPTION OF SHARES 34
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 37
- --------------------------------------------------
PERFORMANCE 37
- --------------------------------------------------
MANAGEMENT OF THE FUND 38
- --------------------------------------------------
DISTRIBUTOR 39
- --------------------------------------------------
ADDITIONAL INFORMATION 40
- --------------------------------------------------
</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>
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 of
$500,000 or more 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.
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
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 Fund 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.
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.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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
of $500,000 or more, will be made at net asset value with no initial sales
charge, but may be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase. The $500,000 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 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 different Classes of shares. Investors should understand that the pur-
pose 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.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained at Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition,
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
certain investors, including qualified retirement plans and certain institu-
tional investors, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data"), for-
merly 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 the purchase of Fund shares through the Systematic Investment
Plan is described below. 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. The minimum initial investment require-
ments for Class A, Class B and Class C shares and the subsequent investment
requirement for all classes for shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$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 "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advisory and
management services to investment companies affiliated with Smith Barney. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Hold-
ings 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."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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. 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 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 distribution rein-
vestments 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 tech-
niques may involve greater than ordinary investment risks and the likelihood of
more volatile price fluctuation. See "Investment Objective and Management Poli-
cies."
7
<PAGE>
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 the Fund's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 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 0.17% 0.18% 0.18% 0.07%
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.27% 2.03% 2.03% 0.92%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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.
Class A shares of the Fund purchased through the Smith Barney AssetOne Program
will be subject to an annual asset-based fee, payable quarterly, in lieu of the
initial sales charge. The fee will vary to a maximum of 1.50%, depending on the
amount of assets held through the Program. For more information, please call
your Smith Barney Financial Consultant.
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) and
ExecChoice(TM) Programs. 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% distribution fee. "Other Expenses" in the above table
include fees for share -
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
holder 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>
MANAGED GROWTH FUND 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 $88 $116 $196
Class B.................................. $71 $94 $119 $217
Class C.................................. $31 $64 $109 $236
Class Y.................................. $ 9 $29 $ 51 $113
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. $62 $88 $116 $196
Class B.................................. $21 $64 $109 $217
Class C.................................. $21 $64 $109 $236
Class Y.................................. $ 9 $29 $ 51 $113
- ------------------------------------------------------------------------------
</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>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Fund's annual report
dated December 31, 1996. The information set out below should be read in con-
junction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into the Statement of Additional Information.
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEAR.
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 1996(1) 1995(1)(2)
- ----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.03 $12.00
- ----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.10 0.16
Net realized and unrealized gain 1.84 0.02
- ----------------------------------------------------------
Total Income From Operations 1.94 0.18
- ----------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income (0.09) (0.15)
Net realized gains (0.46) --
- ----------------------------------------------------------
Total Distributions (0.55) (0.15)
- ----------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.42 $12.03
- ----------------------------------------------------------
TOTAL RETURN 16.33% 1.53%++
- ----------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $218,927 $160,487
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.27% 1.19%+
Net investment income 0.84 2.74+
- ----------------------------------------------------------
PORTFOLIO TURNOVER RATE 34% 6%
- ----------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06
- ----------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEAR.
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 1996(1) 1995(1)(2)
- ---------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.02 $12.00
- ---------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.01 0.11
Net realized and unrealized gain 1.84 0.02
- ---------------------------------------------------------
Total Income From Operations 1.85 0.13
- ---------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income -- (0.11)
Net realized gains (0.46) --
- ---------------------------------------------------------
Total Distributions (0.46) (0.11)
- ---------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.41 $12.02
- ---------------------------------------------------------
TOTAL RETURN 15.55% 1.16%++
- ---------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $484,673 $300,000
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.03% 1.94%+
Net investment income 0.08 1.99+
- ---------------------------------------------------------
PORTFOLIO TURNOVER RATE 34% 6%
- ---------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06
- ---------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEAR.
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 1996(1) 1995(1)(2)
- --------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.03 $12.00
- --------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.00* 0.11
Net realized and unrealized gain 1.84 0.03
- --------------------------------------------------------
Total Income From Operations 1.84 0.14
- --------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income -- (0.11)
Net realized gains (0.46) --
- --------------------------------------------------------
Total Distributions (0.46) (0.11)
- --------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.41 $12.03
- --------------------------------------------------------
TOTAL RETURN 15.45% 1.16%++
- --------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $68,340 $42,530
- --------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.03% 1.91%+
Net investment income 0.08 2.02+
- --------------------------------------------------------
PORTFOLIO TURNOVER RATE 34% 6%
- --------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06
- --------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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.
* Amount Represents less than $0.01 per share.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF CLASS Y SHARES OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE
PERIOD.
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 1996(1)(2)
- ------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.21
- ------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.12
Net realized and unrealized gain 1.69
- ------------------------------------------------
Total Income From Operations 1.81
- ------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income (0.13)
Net realized gains (0.46)
- ------------------------------------------------
Total Distributions (0.59)
- ------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.43
- ------------------------------------------------
TOTAL RETURN++ 14.97%
- ------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $65,499
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 0.92%
Net investment income 1.12%
- ------------------------------------------------
PORTFOLIO TURNOVER RATE 34%
- ------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06
- ------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from January 31, 1996 (inception date) to December 31,
1996.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
13
<PAGE>
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 and reverse
repurchase agreements, sell securities short "against the box", purchase the
securities of companies with less than three years of continuous operation,
lend its portfolio securities and invest in real estate investment trusts and
foreign securities. Additionally, the Fund may, subject to the limitations set
forth in the 1940 Act, invest in the securities of other closed-end 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 and 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 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 opportuni-
14
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
ty, 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 utilize listed options (including puts,
calls, interest rate and currency swaps, caps, collars, spreads, straddles and
floors) with respect to its portfolio securities. The Fund realizes a fee (re-
ferred to as a "premium") for granting the rights evidenced by the options. A
put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying security at a specified
price at any time during the option period. In contrast, 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.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. 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 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
15
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
do so. To facilitate closing purchase transactions, however, the Fund ordinar-
ily will write options only if a secondary market for the options exists on
domestic securities exchanges or in the over-the-counter market.
Purchasing Put and Call Options on Securities. The Fund may utilize up to 5%
of its assets to purchase put options on portfolio securities and may do so at
or about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits the risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of, or in the yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. The Fund may utilize up to 5% of its
assets to purchase call options on portfolio securities. Call options may be
purchased by the Fund in order to acquire the underlying securities for the
Fund at a price that avoids any additional cost that would result from a sub-
stantial increase in the market value of a security. The Fund also may purchase
call options to increase its return to investors at a time when the call is
expected to increase in value due to anticipated appreciation of the underlying
security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options it has pur-
chased, of options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
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 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"; 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 generally 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 move-
ments in the
16
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
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 clos-
ing 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 purchaser
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 contracts to purchase
securities when SBMFM anticipates purchasing the underlying securities and
believes that prices will rise before the purchases will be made. The Fund's
custodian will maintain, in a segregated account of the Fund, cash, debt secu-
rities of any grade or equity securities having a value equal to or greater
than the Fund's obligations, provided such securities have been determined by
SBMFM to be liquid and unencumbered, and are marked to market daily, pursuant
to guidelines established by the Directors. 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
17
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
receiving additional collateral or in the recovery of the securities or possi-
ble 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.
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
foreign 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 regulatory 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 possibility 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
trading for a lower price, having less liquidity than their underlying securi-
ties 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
securities eligible for resale under Rule 144A of the Securities Act ("Rule
144A securities"). The Board of Directors of the Fund may determine that spe-
cific Rule 144A securities held by the Fund may be deemed liquid. Neverthe-
less, due to changing market or other factors, Rule 144A securities may be
subject to a greater possibility of becoming illiquid than registered securi-
ties.
Borrowing. The Fund may also borrow money from banks temporarily for emer-
gency purposes in an amount not exceeding 33 1/3% of the Fund's total assets.
18
<PAGE>
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 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 deter-
mined 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
19
<PAGE>
VALUATION OF SHARES (CONTINUED)
valuation. Any assets or liabilities initially expressed in terms of foreign
currencies will be converted into U.S. dollar values at the mean between the
bid and offered quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer. Securities for which market quotations are
not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service
approved by the Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund'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 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.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund 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
20
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Fund as capital gains dividends are taxable to shareholders as long-term capi-
tal 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 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 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 advi-
sors 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 redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000 (except for pur-
chases of Class Y shares by Smith Barney Concert Allocation 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 retire-
ment plans of Smith Barney and its affiliates. Investors meeting this criteria
who are interested in acquiring Class Z shares should consult a Smith Barney
Financial Consultant for a Class Z
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shares prospectus. See "Prospectus Summary--Alternative Purchase Arrangements"
for a discussion of factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. In addition, certain investors, including qualified retirement plans and
certain other institutional investors, may purchase shares directly from the
Fund through First Data. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A, Class B, Class C or Class Y
shares. Smith Barney and other broker/dealers may charge their customers an
annual account maintenance fee in connection with a brokerage account through
which an investor purchases or holds shares. Accounts held directly at First
Data are not subject to a maintenance fee.
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. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants 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 shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, 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. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis. The mini-
mum initial investment requirement for Class A, Class B and Class C shares and
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 or Trustees of any of the Smith
Barney Mutual Funds 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 First Data. Share certificates are issued only
upon a shareholder's written request to First Data.
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
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
received by the Fund or Smith Barney prior to Smith Barney's close of busi-
ness. For shares purchased through Smith Barney or Introducing Brokers pur-
chasing 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 First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a quarterly basis, 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 First Data. 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 avail-
able 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 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 of $500,000 or more 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.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 and his or her immediate family, 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) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such per-
sons 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 to effect with the combination of such
company with the Fund by merger, acquisition of assets or otherwise; (c) pur-
chases of Class A shares by any client of a newly employed Smith Barney Finan-
cial Consultant (for a period up to 90 days from the commencement of the Finan-
cial 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 employ-
er, (ii) was sold to the client by the Financial Consultant and (iii) was sub-
ject to a sales charge; (d) purchases by 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) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants from a 401(k) plan offered to employees of Travelers or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k) Program
(Note: subsequent investments will be subject to the applicable sales charge);
(g) purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and (h) purchases by investors participating in a Smith Bar-
ney fee-based arrangement. In order to obtain such discounts, the purchaser
must provide sufficient information at the time of purchase to permit verifica-
tion that the purchase would qualify for the elimination of the sales charge.
24
<PAGE>
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 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 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 pur-
chase 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 invest-
ments pursuant to retirement plans under Section 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 individ-
ual 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 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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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 pur-
chases 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 previ-
ously 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 First Data 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 First Data 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 that were purchased without an initial sales
charge but subject to a CDSC.
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.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
<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 and thereafter 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 addition, a certain portion of Class B Dividend Shares will be
converted at that time. See "Prospectus Summary--Alternative Purchase Arrange-
ments--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
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
other Smith Barney Mutual Funds, and Fund shares being redeemed will be con-
sidered to represent, as applicable, capital appreciation or dividend and cap-
ital 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
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 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 to effect 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 FIRST DATA in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. 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 sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five-year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. Such Plans will be notified in writing within 30 days after the last
business day of
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the calendar year and, unless the exchange offer has been rejected in writing,
the exchange will occur on or about the last business day of the following
March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Program,
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of the Fund regardless of asset
size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Program. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class
A shares of the Fund. Any Class C shares not converted will continue to be sub-
ject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program ExecChoice(TM) Program must purchase such shares directly
from First Data. For further information regarding these Programs, investors
should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing 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 Par-
ticipating 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 Participat-
ing 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 fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distribu -
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
tions, plus the current net asset value of Class B shares purchased more than
eight years prior to the redemption, plus increases in the net asset value of
the shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the applica-
bility of the CDSC to redemptions by other shareholders, which depends on the
number of years since those shareholders made the purchase payment from which
the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the 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.
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.
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
Growth and Income Funds
Concert Social Awareness Fund
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 Utilities Fund
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++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 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--National 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 Allocation Series Inc.
Smith Barney Allocation Concert Series Inc.--Balanced Portfolio
Smith Barney Allocation Concert Series Inc.--Conservative Portfolio
Smith Barney Allocation Concert Series Inc.--Growth Portfolio
Smith Barney Allocation Concert Series Inc.--High Growth Portfolio
Smith Barney Allocation Concert Series Inc.--Income Portfolio
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 and Class B 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, participating plans opened prior to June 21, 1996 and investing
in Class C shares may exchange Fund shares for Class C shares of this
Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder 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 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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective class in any of the funds identified above may do so without impo-
sition 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)
33
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
remain invested in the Fund or exchange into any of the funds of the Smith Bar-
ney Mutual Funds listed above, which position the shareholder would be expected
to maintain for a significant period of time. All relevant factors will be con-
sidered 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. Redemption procedures dis-
cussed 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 reg-
istration 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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 business 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 share-
holder'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.
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting 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 5128
Westborough, Massachusetts 01581-5128
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. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic 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 invest-
or's address of record. First Data 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
First Data 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.
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with sig-
nature guarantee that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial 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 First Data
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 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 First Data 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 and account num-
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
ber 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, 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 involuntary liquidation.
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
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 cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The
37
<PAGE>
PERFORMANCE (CONTINUED)
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 FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund'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, custo-
dian 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 offi-
cer 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, 1997, in excess of $80 bil-
lion.
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 invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers 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 man-
agement has determined that it is comparable to the fee charged by other
investment advisers of investment companies that have similar investment objec-
tives and policies.
PORTFOLIO MANAGEMENT
Doug Johnson, a Director of the Mutual Fund Division of Smith Barney, serves
as Vice President and Investment Officer of the Fund and 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.
38
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended December 31, 1996 is included
in the Annual Report dated December 31, 1996. 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 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 Con-
sultants 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 print-
ing 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 carry-
ing 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 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.
39
<PAGE>
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 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, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as custodian of the Fund's investments.
First Data, 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 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, 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 household hav-
ing multiple accounts with the identical address of record will receive a sin-
gle copy of each report. Shareholders who do not want this consolidation to
apply to their accounts should contact their Smith Barney Financial Consultant
or First Data.
40
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
MANAGED
GROWTH
FUND
388 Greenwich Street
New York, New York 10013
FD 0899 4/97
P R O S P E C T U S
SMITH BARNEY
Managed
Growth
Fund
Class Z Shares Only
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS April 30, 1997
Smith Barney
Managed Growth Fund--Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 "Com-
pany"). The Fund is an open-end, diversified management investment company com-
monly 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 Prospectus
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 30, 1997, 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>
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, EXCHANGE AND REDEMPTION OF SHARES 12
- -------------------------------------------------
PERFORMANCE 13
- -------------------------------------------------
MANAGEMENT OF THE FUND 13
- -------------------------------------------------
ADDITIONAL INFORMATION 15
- -------------------------------------------------
</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>
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:
<TABLE>
<CAPTION>
MANAGED GROWTH FUND--CLASS Z
- -------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.85%
Other Expenses 0.12
- -------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.97%
- -------------------------------------------------
</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
"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 in Class Z shares of
the Fund, assuming (1) a 5.00% annual return
and (2) redemption at the end of each time
period: $10 $31 $54 $119
</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 REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Fund's annual report dated
December 31, 1996. 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 to Shareholders, which is incorporated by reference into the
Statement of Additional Information.
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
MANAGED GROWTH FUND 1996(1) 1995(1)(2)
- ----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.03 $ 11.83
- ----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.15 0.04
Net realized and unrealized gain 1.84 0.32
- ----------------------------------------------------------
Total Income From Operations 1.99 0.36
- ----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.13) (0.16)
Net realized gains (0.46) --
- ----------------------------------------------------------
Total Distributions (0.59) (0.16)
- ----------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.43 $ 12.03
- ----------------------------------------------------------
TOTAL RETURN 16.69% 3.06%++
- ----------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $22,296 $10,040
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.97% 0.90%+
Net investment income 1.12 2.30+
- ----------------------------------------------------------
PORTFOLIO TURNOVER RATE 34% 6%
- ----------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $ 0.06 $ 0.06
- ----------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) 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>
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 and reverse
repurchase agreements, sell securities short "against the box", purchase the
securities of companies with less than three years of continuous operation,
lend its portfolio securities and invest in real estate investment trusts and
foreign securities. Additionally, the Fund may, subject to the limitations set
forth in the 1940 Act, invest in the securities of other closed-end 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 and 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.
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
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
common stock. In investing in convertible securities, the Fund seeks the oppor-
tunity, through the conversion feature, to participate in the capital apprecia-
tion of the common stock into which the securities are convertible.
Covered Option Writing. The Fund may utilize listed options (including puts,
calls, interest rate and currency swaps, caps, collars, spreads, straddles and
floors) with respect to its portfolio securities. The Fund realizes a fee (re-
ferred to as a "premium") for granting the rights evidenced by the options. A
put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying security at a specified
price at any time during the option period. In contrast, 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.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. 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 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
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
Purchasing Put and Call Options on Securities. The Fund may utilize up to 5%
of its assets to purchase put options on portfolio securities and may do so at
or about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits the risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of, or in the yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. The Fund may utilize up to 5% of its
assets to purchase call options on portfolio securities. Call options may be
purchased by the Fund in order to acquire the underlying securities for the
Fund at a price that avoids any additional cost that would result from a sub-
stantial increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying securi-
ty.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options it has pur-
chased, of options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
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 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"; 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 generally 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
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 clos-
ing 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 purchaser
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 contracts to purchase
securities when SBMFM anticipates purchasing the underlying securities and
believes that prices will rise before the purchases will be made. The Fund's
custodian will maintain, in a segregated account of the Fund, cash, debt secu-
rities of any grade or equity securities having a value equal to or greater
than the Fund's obligations, provided such securities have been determined by
SBMFM to be liquid and unencumbered, and are marked to market daily pursuant to
guidelines established by the Directors. 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 bro-
kers, 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 government
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
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
receiving additional collateral or in the recovery of the securities or possi-
ble 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.
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
foreign 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 regulatory 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 possibility 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
trading for a lower price, having less liquidity than their underlying securi-
ties 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. relating to the issu-
ing 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%
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"). The Board of Directors of the Fund may determine that spe-
cific Rule 144A securities held by the Fund may be deemed liquid. Neverthe-
less, due to changing market or other factors, Rule 144A securities may be
subject to a greater possibility of becoming illiquid than registered securi-
ties.
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Borrowing.The Fund may also borrow money from banks temporarily for emergency
purposes in an amount not exceeding 33 1/3% 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. 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 nor-
mally 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
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.
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 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 deter-
mined 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
10
<PAGE>
VALUATION OF SHARES (CONTINUED)
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 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 4.00% 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.
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 Octo-
ber, November or December of any calendar year to shareholders of record on a
date in
11
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 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 docu-
ments and/or tax advisors for specific information on the tax consequences of
participating in a Qualified Plan.
PURCHASE, EXCHANGE 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."
Qualified Plans may redeem their shares on any day on which the Fund calcu-
lates 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
12
<PAGE>
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES (CONTINUED)
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.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
PERFORMANCE
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 Fund rests with
the Company's Board of Directors. The Directors approve all significant agree
-
13
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED) DATE
ments between the Company and the companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment advis-
er, custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager. The Statement of Additional Infor-
mation 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, 1997, in excess of $80 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, serves
as Vice President and Investment Officer of the Fund and is responsible for
the management of the Fund's assets. Prior to joining Smith Barney, Mr. John-
son 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, 1996 is included
in the Annual Report dated December 31, 1996. 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
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and services as the Fund's distributor. Smith Barney is a wholly-owned subsid-
iary of Travelers.
14
<PAGE>
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 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, National Association is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 and serves as custodian of the Fund's invest-
ments.
First Data Investor Services Group, Inc. ("First Data") is located at
Exchange Place, Boston, Massachusetts 02109 and serves as the Company's trans-
fer 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, 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. Shareholders who do not want this con-
solidation to apply to their accounts should contact their Smith Barney Finan-
cial Consultant or First Data.
15
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
MANAGED
GROWTH
FUND
388 Greenwich Street
New York, New York 10013
FD 01010 4/97
<PAGE>
(This page intentionally left blank.)
PROSPECTUS
SMITH BARNEY
Investment
Grade
Bond
Fund
APRIL 30, 1997
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus April 30, 1997
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Investment Grade Bond Fund (the "Fund") has an investment
objective of high current income consistent with prudent investment management
and preservation of capital by investing in bonds and other income-producing
securities.
The Fund is one of a number of funds, each having distinct investment
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 briefly sets forth certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an 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 30, 1997, 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>
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 11
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Investment Objective and Management Policies 16
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Valuation of Shares 20
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Dividends, Distributions and Taxes 21
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Purchase of Shares 23
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Exchange Privilege 33
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Redemption of Shares 36
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Minimum Account Size 38
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Performance 39
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Management of the Company and the Fund 40
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Distributor 41
- --------------------------------------------------------------------------------
Additional Information 42
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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>
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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 to provide as high a level of current income as is consistent
with prudent investment management and preservation of capital. Under normal
circumstances, the Fund will invest at least 65% of its assets in bonds. See
"Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the 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. 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 of $500,000
or more will be made at net asset value with no sales charge, but will be
subject to a contingent deferred sales charge ("CDSC") of 1.00% on redemptions
made within 12 months of purchase. See "Prospectus Summary -- Reduced or No
Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.25% and an annual distribution fee of 0.50% of the average daily net
assets of this Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares-Deferred Sales Charge Alternatives."
3
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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. This 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 Fund 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, 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.
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 of $500,000 or more 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
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
purchase. The $500,000 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 different Classes 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) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operations of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares-Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained at Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investing Services Group, Inc. ("First Data").
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
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 investment
requirements for purchases of Fund shares through the Systematic Investment Plan
are described below. 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. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $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 at the respective
net asset values next determined. 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."
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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, 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, Distribution 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
does not have a stated maturity policy, but will generally invest in medium- to
long-term securities, which are generally more sensitive to interest rate
changes, market conditions and other economic news than shorter-term securities.
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."
7
<PAGE>
- --------------------------------------------------------------------------------
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>
Investment Grade Bond Fund Class A Class B Class C Class Y
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 4.50% 1.00% None
- ---------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.65% 0.65% 0.65% 0.65%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses 0.14 0.14 0.07 0.07
- ---------------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.04% 1.54% 1.42% 0.72%
===================================================================================================
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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.
Class A shares of the Fund purchased through the Smith Barney Asset One
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the program. For more information, please
call your Smith Barney Financial Consultant.
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)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the value
of average daily net assets of Class A shares. Smith Barney also receives, with
respect to Class B shares, an annual 12b-1 fee of 0.75% of the value of average
daily net assets of that Class, consisting of a 0.50% distribution fee and a
0.25% service fee. For Class C shares, Smith Barney receives an annual 12b-1 fee
of 0.70% of the value of average daily net assets of the Class, consisting of a
0.45% distribution fee
8
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
and a 0.25% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Company and the Fund."
Example 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 $ 55 $ 77 $100 $166
Class B 61 79 94 170
Class C 24 45 78 170
Class Y 7 23 40 89
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
Class A 55 77 100 166
Class B 16 49 84 170
Class C 14 45 78 170
Class Y 7 23 40 89
- --------------------------------------------------------------------------------
* 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.
9
<PAGE>
(This page intentionally left blank.)
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for the two-year period ended December 31, 1996
has been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The
following information for the fiscal years ended December 31, 1987 through
December 31, 1994 has been audited by other independent 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 of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1996 1995(1) 1994(1) 1993(1) 1992(2)
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.67
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.80 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) (0.90) 2.80 (1.88) 1.27 0.23
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 3.63 (1.14) 2.15 0.37
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.89) (0.86) (0.88) (0.14)
Overdistribution of net investment income -- -- -- (0.01) --
Net realized gains (0.12) (0.16) (0.31) (0.14) --
Capital -- -- (0.03) -- (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.88) (1.05) (1.20) (1.03) (0.15)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.27 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- ----------------------------------------------------------------------------------------------------------------------------
Total Return+++ (0.47)% 35.29% (8.95)% 18.45% 3.25%++
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $206,002 $226,373 $181,334 $ 10,136 $ 933
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) 1.04% 1.11% 1.11% 1.11% 1.03%+
Net investment income 6.63 7.02 7.35 6.67 7.53+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 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 with results of
operations.
(2) For the period from November 6, 1992 (inception date) to December 31, 1992.
(3) For the year ended December 31, 1992, the expense ratios were calculated
excluding 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.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1996 1995(1) 1994(1) 1993(1)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.74 0.77 0.82 0.80
Net realized and unrealized
gain (loss) (0.90) 2.80 (2.02) 1.29
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.16) 3.57 (1.20) 2.09
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.68) (0.83) (0.80) (0.82)
Overdistribution of net investment
income -- -- -- (0.01)
Net realized gains (0.12) (0.16) (0.31) (0.14)
Capital -- -- (0.03) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.99) (1.14) (0.97)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.29 $ 13.25 $ 10.67 $ 13.01
- -----------------------------------------------------------------------------------------------
Total Return+ (0.89)% 34.63% (9.41)% 18.06%
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $258,331 $288,533 $221,120 $476,088
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54% 1.61% 1.57% 1.58%
Net investment income 6.13 6.51 6.89 6.20
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 49% 18% 65%
===============================================================================================
</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.
* 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.
+ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1992 1991 1990 1989 1988 1987
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.80 $ 10.43 $ 11.01 $ 10.33 $ 10.55 $ 12.91
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.83 0.86 0.86 0.87*** 0.90*** 0.89
Net realized and unrealized
gain (loss) 0.12 1.38 (0.57) 0.68 (0.24) (1.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.95 2.24 0.29 1.55 0.66 0.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.83) (0.87) (0.87) (0.87) (0.88) (1.12)
Overdistribution of net investment
income -- -- -- -- -- --
Net realized gains -- -- -- -- -- (0.89)
Capital (0.03) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.86) (0.87) (0.87) (0.87) (0.88) (2.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 11.89 $ 11.80 $ 10.43 $ 11.01 $ 10.33 $ 10.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return+ 8.36% 22.50% 2.98% 15.57% 6.43% (2.83)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $431,783 $413,878 $405,779 $483,382 $532,794 $705,561
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.57%* 1.53% 1.58% 1.63%** 1.22%** 1.62%
Net investment income 6.99 7.90 8.20 8.07 8.74 7.96
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 82% 59% 118% 72% 79%
====================================================================================================================================
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class C share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1996 1995(1) 1994(1) 1993(1)(2)
===================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.26 $10.67 $13.01 $12.56
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.78 0.75 0.63
Net realized and unrealized gain (loss) (0.90) 2.80 (1.95) 0.65
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.15) 3.58 (1.20) 1.28
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.69) (0.83) (0.80) (0.68)
Overdistribution of net investment income -- -- -- (0.01)
Net realized gains (0.12) (0.16) (0.31) (0.14)
Capital -- -- (0.03) --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.81) (0.99) (1.14) (0.83)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.30 $13.26 $10.67 $13.01
- ---------------------------------------------------------------------------------------------------
Total Return+++ (0.83)% 34.74% (9.41)% 10.38%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $6,724 $3,769 $ 999 $ 208
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.42% 1.56% 1.57% 1.61%+
Net investment income 6.28 6.55 6.89 6.17+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 49% 18% 65%
===================================================================================================
</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 26, 1993 (inception date) to December 31,
1993.
++ 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class Y share of capital stock outstanding throughout each year:
Investment Grade Bond Fund 1996(1)
================================================================================
Net Asset Value, Beginning of Year $13.03
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.75
Net realized and unrealized loss (0.66)
- --------------------------------------------------------------------------------
Total Income From Operations 0.09
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.72)
Net realized gains (0.12)
- --------------------------------------------------------------------------------
Total Distributions (0.84)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $12.28
- --------------------------------------------------------------------------------
Total Return++ 1.01%
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $18,174
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.72%
Net investment income 7.34
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 48%
================================================================================
(1) For the period from February 7, 1996 (inception date) to December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
15
<PAGE>
- --------------------------------------------------------------------------------
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 & Poors
Ratings Group ("S&P") is contained in the Appendix to the Statement of
Additional Information.
The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions and the
Fund's investment objective are fundamental policies, which means that they may
not be changed without a majority vote of shareholders of the Fund. Except for
the objective and those restrictions specifically identified as fundamental, all
investment policies and practices described in this Prospectus and in the
Statement of Additional Information are non-fundamental, so that the Board of
Directors may change them without shareholder approval. The fundamental
restrictions applicable to the Fund include a prohibition on (a) purchasing a
security if, as a result, more than 5% of the assets of the Fund would be
invested in the securities of the issuer (with certain exceptions) or the Fund
would own more than 10% of the outstanding voting securities of the issuer, (b)
investing more than 10% of the Fund's total assets in "illiquid" securities
(which includes repurchase agreements with more than seven days to maturity),
and (c) investing more than 25% of the Fund's total assets in the securities of
issuers in a particular industry (with exceptions for 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 primarily in fixed
income securities that are of a higher credit quality and present a lower risk
of principal loss at maturity. Such securities are typically considered
"investment grade" quality, i.e. securities having a rating within one of the
four highest rating categories of their class. The Fund will invest primarily in
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 speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments, including a greater possibility of default or bankruptcy of the
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
issuer, than is the case with higher grade bonds. Subsequent to its purchase by
the Fund, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for 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.
The Fund's portfolio will be managed by purchasing and selling securities,
as well as holding selected securities to maturity. In managing the Fund's
portfolio, SBMFM analyzes the business and credit qualities of a particular
issuer as well as the economy in general to identify and monitor trends and to
identify fixed-income securities with characteristics most likely to meet the
Fund's objective. This process requires ongoing adjustments to the portfolio
based on the relative values or maturities of individual debt securities or
changes in the creditworthiness or overall investment merits of an issue.
Any such change in the Fund's portfolio may result in increases or
decreases in the Fund's current income available for distribution to
shareholders. If the Fund's expectations of changes in interest rates or its
evaluation of the normal yield relationships between securities prove to be
incorrect, the Fund's income, net asset value and potential capital gain may be
reduced or its potential capital loss may be increased. An increase in interest
rates will generally reduce the value of portfolio investments (and, therefore,
the net asset value of the shares of the Fund), and a decline in interest rates
will generally increase their value. The average weighted maturity of a bond
fund can be used to measure the fund's sensitivity to interest rate movements.
The longer the Fund's average weighted maturity, the more sensitive the net
asset value is to interest rate changes. The Fund has no stated maturity policy,
but generally invests in medium- to long-term securities. At times, the Fund's
portfolio may have an average weighted maturity exceeding 25 years which would
result in the Fund's net asset value being extremely sensitive to interest rate
movements. Since all investments, including securities with a higher credit
quality, have inherent market risks and fluctuations in value due to changing
economic conditions and other factors, the Fund, of course, cannot assure that
its investment objective will be achieved.
The Fund may enter into repurchase agreements, reverse repurchase
agreements, firm commitment agreements, "short sales against the box", borrow
money from banks as a temporary measure for extraordinary or emergency purposes,
invest in real estate investment trusts, purchase the securities of companies
with less than three years of continuous operation, and may lend its portfolio
securities. Except when in a temporary defensive investment position, the
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Fund intends to maintain at least 65% of its assets invested in investment grade
bonds.
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the United States government, its agencies or
instrumentalities. These include bills, certificates of indebtedness, and notes
and bonds issued by the United States Treasury or by agencies or
instrumentalities of the United States government. Some U.S. government
securities, such as U.S. Treasury bills and bonds, are supported by the full
faith and credit of the United States Treasury; others are supported by the
right of the issuer to borrow from the United States Treasury; others, such as
those of the Federal National Mortgage Association, are supported by the
discretionary authority of the United States government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association and the Federal Home Loan Mortgage Corporation ("FHLMC") are
supported only by the credit of the instrumentality. 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
certificate. 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.
Yankee Obligations. The Fund may also invest in Yankee obligations. Yankee
obligations are dollar denominated obligations issued in the U.S. capital
markets by foreign issuers. Yankee obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might prevent
dollar denominated funds from flowing across its borders. Other risks include:
adverse political and economic developments in a foreign country; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and expropriation or nationalization of
foreign issuers.
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
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
an obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest. The
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SBMFM, 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 cash or other debt obligations of any grade
having a value equal to or greater than Fund's obligations, provided such
securities have been determined by SBMFM to be liquid and unencumbered and are
marked to market daily pursuant to guidelines established by the Directors
("eligible segregated assets") 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 eligible
segregated assets 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
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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
in good standing and will not be made unless, in the judgement of SBMFM, the
consideration to be earned from such loans would justify the risk.
Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and
selects broker-dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable
commission rates. SBMFM may select broker-dealers which provide it with research
services and may cause the Fund to pay such broker-dealers commissions which
exceed those other broker-dealers may have charged, if it views the commissions
as reasonable in relation to the value of the brokerage and/or research
services.
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 total number of
shares of the Class outstanding.
20
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there were no
sales during the day, at the current quoted bid price. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Fund securities which are primarily traded on foreign exchanges may be
valued with the assistance of a pricing service and are generally valued at the
preceding closing values of such securities on their respective exchanges,
except that when an occurrence subsequent to the time a foreign security is
valued is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Directors. Unlisted foreign securities are valued at
the mean between the last available bid and offer price prior to the time of
valuation. U.S. over-the-counter securities will be valued on the basis of the
bid price at the close of business on each day. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
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
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
The Fund declares and pays dividends monthly consisting of estimated daily
net investment income. Any net realized long-term capital gains, after
utilization of capital loss carryforwards, will be distributed at least
annually. Net realized short-term capital gains may be paid with the
distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends and capital gains
will be reinvested automatically in additional shares of the same Class at net
asset value subject to no sales charge or CDSC. In order to avoid the
application of a 4% nondeductible excise tax on certain undistributed amounts of
ordinary income and capital gains, the Fund may make an additional distribution
shortly before December 31 in each year of any undistributed ordinary income or
capital gains and
21
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 applicable 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 distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
The per share dividends and distributions on Class B and Class C shares may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and Class
C shares. The per share dividends on Class A shares of the Fund may be lower
than the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide basis.
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code. In any taxable year in which the Fund so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses), the Fund (but
not its shareholders) generally will be relieved of Federal income tax on the
investment company taxable income and net realized capital gains (the excess of
net long-term capital 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.
22
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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, if any, consisting of interest from U.S. government securities may be
exempt from all state and local income taxes. Investors should consult their tax
advisors for specific information on the tax consequences of particular types of
distributions.
- --------------------------------------------------------------------------------
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 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 Allocation 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.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase shares
directly through First Data. When purchasing shares of the Fund, investors must
specify whether the
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
purchase is for Class A, Class B, Class C or Class Y shares. Smith Barney and
other broker/dealers may charge their customers an annual account maintenance
fee in connection with a brokerage account through which an investor purchases
or holds shares. Accounts held directly at First Data are not subject to a
maintenance fee.
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 shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment
requirement for all classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, 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 or Trustees of any of the Smith
Barney Mutual Funds 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 Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
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 the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or an Introducing Broker
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.
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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 First Data.
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 charge 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>
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 of $500,000 or more 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 and his or her immediate family or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
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) Board Members and
25
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); 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 to effect 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) purchases by 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) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of Travelers or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note:
subsequent investments will be subject to the applicable sales charge); (g)
purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and (h) purchases by investors participating in a Smith
Barney fee-based arrangement. 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.
26
<PAGE>
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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 the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the group.
To be eligible for such reduced sales charges or to purchase at net asset value,
all purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to 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 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
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data 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%. Please contact a Smith Barney
Financial Consultant or First Data 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 that were purchased without an initial
sales charge but subject to a CDSC.
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 that 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
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Class B
shares held under the Smith Barney 401(k) Program, as described below. See
"Purchase of Shares-Smith Barney 401(k) and ExecChoice(TM) Programs."
Year Since Purchase
Payment Was Made CDSC
- --------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 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 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. 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.
29
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "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 attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect 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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class C shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class C shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. 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 sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
30
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at
the end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five-year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans will
be notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for the
five-year exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the Participating Plan
qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A shares
of 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.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class C shares for Class A shares of the Fund regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Program. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class C shares not converted will continue to be subject
to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Fund are not available for purchase by Participating Plans opened on or after
June 21,
31
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
1996, but may continue to be purchased by any Participating Plan in the Smith
Barney 401(k) Program opened prior to such date and originally investing in such
Class. Class B shares acquired are subject to a CDSC of 3.00% of redemption
proceeds if the Participating Plan terminates within eight years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, the Participating Plan will be
offered the opportunity to exchange all of its Class B shares for Class A shares
of the Fund. Such Participating Plan 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."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased more
than eight years prior to the redemption, plus increases in the net asset value
of the shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by
an employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
32
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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. Exchange 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.
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
Growth and Income Funds
Concert Social Awareness Fund
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 Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ 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 Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
33
<PAGE>
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Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York 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 Allocation Series
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 and Class B 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, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares may exchange Fund shares for Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
34
<PAGE>
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Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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.
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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of shares for shares of the respective
class in any of the funds identified above may do so without imposition of any
charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder. Upon such a
determination, Smith Barney will provide notice in writing or by telephone to
the shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or exchange into any
of the funds of the Smith Barney Mutual Funds ordinarily available, which
position the shareholder would be expected to maintain for a significant period
of time. All relevant factors will be considered in determining what constitutes
an abusive pattern of exchanges.
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.
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.
35
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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 business 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, with 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 Investment Grade Bond Fund
Class A, B, C, or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
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 First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000, 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
36
<PAGE>
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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. First
Data 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 First Data 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 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
First Data 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 First Data 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 First Data
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
37
<PAGE>
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Redemption of Shares
- --------------------------------------------------------------------------------
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 changes, 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 First Data 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 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
the 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 involuntary liquidation.
38
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Performance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund may advertise its 30 day "yield" for each Class
of shares. The yield of a Class refers to the income generated by an investment
in such Class over the 30 day period identified in the 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-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a 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 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.
39
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Management of the Company and the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and companies that furnish services to 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 general and 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 investment companies that had aggregate assets under management as of January
31, 1997 in excess of $80 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers, and securities analysts who provide research services to the Fund.
Under an investment advisory agreement, the Fund pays SBMFM a monthly fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets up to
$500 million and 0.42% of the value of average daily net assets thereafter. For
the fiscal year ended December 31, 1996, SBMFM was paid investment advisory fees
equal to 0.45% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
George E. Mueller, Jr., Managing Director of Smith Barney, 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, 1996 is included in
the Annual Report dated December 31, 1996. A copy of the Annual Report may be
obtained upon request and 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.
40
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Management of the Company and the Fund (continued)
- --------------------------------------------------------------------------------
ADMINISTRATOR -- SBMFM
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 paid an administration 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 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 not 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. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
41
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney, and the payments
may exceed distribution expenses actually incurred. The Company's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in doing so will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time.
The Fund offers shares of common stock currently classified into four
Classes, A, B, C and Y, with a par value of $.001 per share. Each Class of
shares has the same rights, privileges and preferences, except with respect to:
(a) the designation of each Class; (b) the effect of the respective sales
charges, if any, for each Class; (c) the distribution and/or service fees borne
by each Class; (d) the expenses allocable exclusively to each Class; (e) voting
rights on matters exclusively affecting a single Class; (f) the exchange
privilege of each Class; and (g) the conversion feature of the Class B shares.
The Board of Directors does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes of shares of the
Fund. The Directors, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
PNC Bank, located at 17th & Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Company's investments.
First Data, 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, a 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.
42
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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. Shareholders who do not want this
consolidation to apply to their accounts should contact their Smith Barney
Financial Consultants or First Data.
43
<PAGE>
Smith Barney
------------
A Member of Travelers Group
Smith Barney
Investment
Grade Bond
Fund
388 Greenwich Street
New York, New York 10013
FD 0233 4/97
- --------------------------------------------------------------------------------
Prospectus April 30, 1997
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
(800) 544-5445
Smith Barney Investment Grade Bond Fund (the "Fund") has an investment
objective of high current income consistent with prudent investment management
and preservation of capital by investing in bonds and other income-producing
securities.
The Fund is one of a number of funds, each having distinct investment
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 30, 1997, 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 Registered 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.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 12
- --------------------------------------------------------------------------------
Valuation of Shares 17
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 17
- --------------------------------------------------------------------------------
Purchase of Shares 19
- --------------------------------------------------------------------------------
Exchange Privilege 24
- --------------------------------------------------------------------------------
Redemption of Shares 25
- --------------------------------------------------------------------------------
Minimum Account Size 27
- --------------------------------------------------------------------------------
Performance 28
- --------------------------------------------------------------------------------
Management of the Fund 29
- --------------------------------------------------------------------------------
Distributor 30
- --------------------------------------------------------------------------------
Additional Information 31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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 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 Registered
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 of $500,000
or more 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.
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
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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
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 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 of $500,000 or more 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 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 Registered Representatives may receive different
compensation for selling different classes 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 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".
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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.
Subsequent investments of at least $50 may be made for both Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(a) 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 $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 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 and administrator. 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. 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 at the respective
net asset values next determined. 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".
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares of a Class
will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a prorata
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
does not have a stated maturity policy, but will generally invest in medium- to
long-term securities which are generally more sensitive to interest rate
changes, market conditions and other economic news than shorter-term securities.
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>
- --------------------------------------------------------------------------------
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:
INVESTMENT GRADE BOND FUND Class A Class B
================================================================================
Shareholder Transaction Expenses
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%
================================================================================
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 0.14 0.14
================================================================================
TOTAL FUND OPERATING EXPENSES 1.04% 1.54%
================================================================================
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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, consisting 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>
- --------------------------------------------------------------------------------
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."
Investment Grade Bond 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 $ 55 $ 77 $100 $166
Class B 61 79 94 170
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
Class A 55 77 100 166
Class B 16 49 84 170
================================================================================
* 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for the two-year period ended December 31, 1996
has been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The
following information for the fiscal years ended December 31, 1987 through
December 31, 1994 has been audited by other independent 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>
Investment Grade Bond Fund 1996 1995(1) 1994(1) 1993(1) 1992(2)
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.67
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.80 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) (0.90) 2.80 (1.88) 1.27 0.23
- -----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 3.63 (1.14) 2.15 0.37
- -----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.89) (0.86) (0.88) (0.14)
Overdistribution of net investment income -- -- -- (0.01) --
Net realized gains (0.12) (0.16) (0.31) (0.14) --
Capital -- -- (0.03) -- (0.01)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.88) (1.05) (1.20) (1.03) (0.15)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.27 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- -----------------------------------------------------------------------------------------------------------------------
Total Return+++ (0.47) 35.29% (8.95)% 18.45% 3.25%++
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $206,002 $226,373 $181,334 $ 10,136 $ 933
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) 1.04% 1.11% 1.11% 1.11% 1.03%+
Net investment income 6.63 7.02 7.35 6.67 7.53+
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 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 with results of
operations.
(2) For the period from November 6, 1992 (inception date) 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1996 1995(1) 1994(1) 1993(1)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.74 0.77 0.82 0.80
Net realized and unrealized
gain (loss) (0.90) 2.80 (2.02) 1.29
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.16) 3.57 (1.20) 2.09
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.68) (0.83) (0.80) (0.82)
Overdistribution of net investment
income -- -- -- (0.01)
Net realized gains (0.12) (0.16) (0.31) (0.14)
Capital -- -- (0.03) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.99) (1.14) (0.97)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.29 $ 13.25 $ 10.67 $ 13.01
- -----------------------------------------------------------------------------------------------
Total Return++ (0.89)% 34.63% (9.41)% 18.06%
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $258,331 $288,533 $221,120 $476,088
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54% 1.61% 1.57% 1.58%
Net investment income 6.13 6.51 6.89 6.20
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 49% 18% 65%
===============================================================================================
</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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987
===============================================================================================
<S> <C> <C> <C> <C> <C>
$ 11.80 $ 10.43 $ 11.01 $ 10.33 $ 10.55 $ 12.91
- -----------------------------------------------------------------------------------------------
0.83 0.86 0.86 0.87*** 0.90*** 0.89
0.12 1.38 (0.57) 0.68 (0.24) (1.24)
- -----------------------------------------------------------------------------------------------
0.95 2.24 0.29 1.55 0.66 0.35)
- -----------------------------------------------------------------------------------------------
(0.83) (0.87) (0.87) (0.87) (0.88) (1.12)
-- -- -- -- -- --
-- -- -- -- -- (0.89)
(0.03) -- -- -- -- --
- -----------------------------------------------------------------------------------------------
(0.86) (0.87) (0.87) (0.87) (0.88) (2.01)
- -----------------------------------------------------------------------------------------------
$ 11.89 $ 11.80 $ 10.43 $ 11.01 $ 10.33 $ 10.55
- -----------------------------------------------------------------------------------------------
8.36% 22.50% 2.98% 15.57% 6.43% (2.83)%
- -----------------------------------------------------------------------------------------------
$431,783 $413,878 $405,779 $483,382 $532,794 $705,561
- -----------------------------------------------------------------------------------------------
1.57%* 1.53% 1.58% 1.63%** 1.22%** 1.62%
- -----------------------------------------------------------------------------------------------
6.99 7.90 8.20 8.07 8.74 7.96
- -----------------------------------------------------------------------------------------------
47% 82% 59% 118% 72% 79%
===============================================================================================
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
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
Ratings Group ("S&P") is contained in the Appendix to the Statement of
Additional Information.
The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions and the
Fund's investment objective are fundamental policies, which means that they may
not be changed without a majority vote of shareholders of the Fund. Except for
the objective and those restrictions specifically identified as fundamental, all
investment policies and practices described in this Prospectus and in the
Statement of Additional Information are non-fundamental, so that the Board of
Directors may change them without shareholder approval. The fundamental
restrictions applicable to the Fund include a prohibition on (a) purchasing a
security if, as a result, more than 5% of the assets of the Fund would be
invested in the securities of the issuer (with certain exceptions) or the Fund
would own more than 10% of the outstanding voting securities of the issuer, (b)
investing more than 10% of the Fund's total assets in "illiquid" securities
(which includes repurchase agreements with more than seven days to maturity),
and (c) investing more than 25% of the Fund's total assets in the securities of
issuers in a particular industry (with exceptions for 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 primarily in fixed
income securities that are of a higher credit quality and present a lower risk
of principal loss at maturity. Such securities are typically considered
"investment grade" quality, i.e., securities having a rating within one of the
four highest rating categories of their class. The Fund will invest primarily in
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 speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
interest payments, including a greater possibility of default or bankruptcy of
the issuer, than is the case with higher grade bonds. Subsequent to its purchase
by the Fund, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for 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 the Manager 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
objectives and policies of the Fund.
The Fund's portfolio will be managed by purchasing and selling securities,
as well as holding selected securities to maturity. In managing the Fund's
portfolio, the Manager analyzes the business and credit qualities of a
particular issuer as well as the economy in general to identify and monitor
trends and to identify fixed-income securities with characteristics most likely
to meet the Fund's objective. This process requires ongoing adjustments to the
portfolio based on the relative values or maturities of individual debt
securities or changes in the credit-worthiness or overall investment merits of
an issue.
Any such change in the Fund's portfolio may result in increases or
decreases in the Fund's current income available for distribution to
shareholders. If the Fund's expectations of changes in interest rates or its
evaluation of the normal yield relationships between securities prove to be
incorrect, the Fund's income, net asset value and potential capital gain may be
reduced or its potential capital loss may be increased. An increase in interest
rates will generally reduce the value of portfolio investments (and, therefore,
the net asset value of the shares of the Fund), and a decline in interest rates
will generally increase their value. The average weighted maturity of a bond
fund can be used to measure the fund's sensitivity to interest rate movements.
The longer the Fund's average weighted maturity, the more sensitive the net
asset value is to interest rate changes. The Fund has no stated maturity policy,
but generally invests in medium- to long-term securities. At times, the Fund's
portfolio may have an average weighted maturity exceeding 25 years which would
result in the Fund's net asset value being extremely sensitive to interest rate
movements. Since all investments, including securities with a higher credit
quality, have inherent market risks and fluctuations in value due to changing
economic conditions and other factors, the Fund, of course, cannot assure that
its investment objective will be achieved.
The Fund may enter into repurchase agreements, reverse repurchase
agreements, firm commitment agreements, "short sales against the box", borrow
money from banks as a temporary measure for extraordinary or emergency purposes,
invest in real estate investment trusts, purchase the securities of
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
companies with less than three years of continuous operation 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 investment
grade bonds.
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the United States government, its agencies or
instrumentalities. These include bills, certificates of indebtedness, 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.
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.
Yankee Obligations. The Fund may invest in Yankee obligations. Yankee
obligations are dollar denominated obligations issued in the U.S. capital
markets by foreign issuers. Yankee obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might prevent
dollar denominated funds from flowing across its borders. Other risks include:
adverse political and economic developments in a foreign country; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and expropriation or nationalization of
foreign issuers.
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
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest. The
Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. The Manager, 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 cash or other debt obligations of any grade
having a value equal to or greater than the Fund's obligations, provided such
securities have been determined by the Manager to be liquid and unencumbered and
are marked to market daily pursuant to guidelines established by the Directors
("eligible segregated assets") 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 eligible
segregated assets 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.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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. The risks in lending portfolio securities, as with other extensions of
secured credit, consists of possible delays 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 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 without
further consideration for, securities of the same issue as the securities sold
short. Short sales "against the box" are used to defer recognition of capital
gains or losses.
American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States.
PORTFOLIO TRANSACTIONS AND TURNOVER
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
commission 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
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".
16
<PAGE>
- --------------------------------------------------------------------------------
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 securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Fund securities which are primarily traded on foreign exchanges may be
valued with the assistance of a pricing service and are generally valued at the
preceding closing values of such securities on their respective exchanges,
except that when an occurrence subsequent to the time a foreign security is
valued is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Directors. Unlisted foreign securities are valued at
the mean between the last available bid and offer price prior to the time of
valuation. U.S. over-the-counter securities will be valued on the basis of the
bid price at the close of business on each day. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
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
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders. The Fund declares and pays dividends
monthly consisting of estimated daily net investment income. Any net realized
long-term capital gains, after utilization of capital loss carryforwards, will
be distributed at least annually. Net realized short-term capital gains may be
paid with the distribution of dividends from net investment income.
If a shareholder does not otherwise instruct, dividends and capital gains
will be reinvested automatically in additional shares of the same Class at net
asset value subject to no sales charge or CDSC. In order to avoid the
application of a 4.00%
17
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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.
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 applicable laws,
a notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of 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 "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
18
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Fund offers two Classes of shares to investors purchasing through PFS
Investments Registered Representatives. Class A shares are sold to investors
with an initial 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 consider in selecting which Class of shares to purchase.
Initial purchases of Fund shares must be made through a PFS Investments
Registered Representative 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 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. Subsequent investments of at least
$50 may be made for both Classes. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the minimum initial and
19
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 certificates are issued only upon a
shareholder's written request to the Sub-Transfer Agent. A shareholder who has
insufficient funds to complete any purchase will be charged a fee of $25 per
returned purchase by PFS or 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 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
preauthorized transfers of $25 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly 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. A shareholder who places a stop payment
on a transfer or the transfer is returned because the account has been closed
will also be charged a fee of $25 by PFS or the Sub-Transfer Agent.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charge 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>
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 of $500,000 or more 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 Registered 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".
20
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases by 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) and who wish to reinvest their
redemption proceeds in the Fund, provided the reinvestment is made within 60
calendar days of the redemption; (d) purchases by accounts managed by registered
investment advisory subsidiaries of Travelers; and (e) sales through PFS
Investments Registered Representatives where the amounts invested represent the
redemption proceeds from investment 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
Registered 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
21
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
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.
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 that were purchased without an initial sales charge but
subject to a CDSC.
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
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
22
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
month. The following table sets forth the rates of the charge for redemptions of
Class B shares by shareholders.
Year Since Purchase
Payment Was Made CDSC
================================================================================
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 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 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 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
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 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
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
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
(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; (e) involuntary
redemptions; and (f) redemption of shares to effect 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
shareholder'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 subject to the other requirements of the fund into which exchanges are made.
FUND NAME
o Concert Social Awareness Fund
o Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
o Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
o Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
o Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
o Smith Barney Concert Allocation Series Inc. -- Income Portfolio
o Smith Barney Appreciation Fund Inc.
o Smith Barney Growth Opportunity Fund
*o Smith Barney Money Funds, Inc. --Cash Portfolio
**o 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 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.
24
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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.
Exchanges will be processed at the net asset value next determined.
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
- --------------------------------------------------------------------------------
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 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
registration. 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
shareholder(s) has had an address
25
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
change in the past 45 days, or if the shareholder(s) is a corporation, sole
proprietor, partnership, trust or fiduciary, signatures 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 administrator.
Additionally, 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
shareholder's bank account of record (defined as a currently established
pre-authorized 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
26
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 ordinarily 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.
- --------------------------------------------------------------------------------
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
the 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 involuntary liquidation.
27
<PAGE>
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund may advertise its 30 day "yield" for each Class
of shares. The yield of a Class refers to the income generated by an investment
in such Class over the 30 day period identified in the 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-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 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 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 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.
The Fund may from time to time illustrate the benefits of tax-deferral by
comparing taxable investments to investments made through tax-deferred
retirement 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 market.
28
<PAGE>
- --------------------------------------------------------------------------------
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 companies that furnish services to the Fund,
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
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 predecessor
entities) has been in the investment counseling business since 1968 and is a
registered investment adviser. The Manager renders investment advice to
investment companies that had aggregate assets under management as of January
31, 1997 in excess of $80 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 portfolio
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, 1996, the Manager 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 Smith Barney, 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, 1996 is included in
the Annual Report dated December 31, 1996. 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.
29
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 a principal underwriter and as such
conducts 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 Registered 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: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Registered
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 Registered 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. Registered 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
Securities 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
Registered 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 promotional incentives, in the form of cash or other
compensation to PFS Investments Registered Representatives that sell shares of
the Fund.
30
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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 Directors
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.
- --------------------------------------------------------------------------------
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 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.
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 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, each of which includes a list of the investment securities held by the
Fund at
31
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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. Shareholders who do not want this consolidation to
apply to their accounts should contact the Sub-Transfer Agent.
Also available at the shareholder's request, is an Account Transcript
identifying every financial transaction in an account since it was opened. To
defray administrative expenses involved with providing multiple years worth of
information, there is a $15 charge for each Account Transcript requested.
Additional copies of tax forms are available at the Shareholder's request.
A $10 charge for each tax form will be assessed.
Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 544-5445.
32
P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
April 30, 1997
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation in a diversified portfolio of common stocks or securities con-
vertible 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 objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). 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 Bar-
ney Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 30, 1997 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 a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- -------------------------------------------------
VALUATION OF SHARES 17
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 17
- -------------------------------------------------
PURCHASE OF SHARES 19
- -------------------------------------------------
EXCHANGE PRIVILEGE 29
- -------------------------------------------------
REDEMPTION OF SHARES 32
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 34
- -------------------------------------------------
PERFORMANCE 34
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND FUND 35
- -------------------------------------------------
DISTRIBUTOR 36
- -------------------------------------------------
ADDITIONAL INFORMATION 37
- -------------------------------------------------
</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 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>
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 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 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 of
$500,000 or more 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 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.
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 no longer will be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 Fund shares which, when com-
bined 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 serv-
ice or distribution fees.
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 and Class C shares are sold without any ini-
tial sales charge so the entire purchase price is immediately invested in the
Fund. Any investment return on these additional invested amounts may partially
or wholly offset the higher annual expenses of these Classes. Because the
Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
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 of $500,000 or more will be made at net asset value with no initial
sales charge, but will be
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
subject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The $500,000 investment may be met by adding the purchase to the net asset
value of all Class A shares held in other 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 different Classes of shares. Investors should understand that the pur-
pose 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) AND EXECCHOICE(TM) PROGRAMS 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See "Pur-
chase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund made
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). 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
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 of shares is $25. The minimum investment requirements for pur-
chases of Fund shares through the Systematic Investment Plan are described
below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes for shareholders purchasing shares through
the Systematic Investment Plan on a monthly basis is $25 and on a quarterly
basis is $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 at the respec-
tive net asset values next determined. 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 a Smith Barney Financial Consultant. 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
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 enter-
ing into repurchase agreements, lending portfolio securities, investing in
restricted securities, selling securities short and investing in foreign secu-
rities through the use of American Depositary Receipts. See "Investment Objec-
tive and Management Policies--Additional Investments."
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 CLASS C CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds whichever is
lower) None* 5.00% 1.00% None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25% 1.00% 1.00% None
Other expenses 0.17% 0.16% 0.15% 0.07%
- -------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.17% 1.91% 1.90% 0.82%
- -------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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.
Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the program. For more information, please
call your Smith Barney Financial Consultant.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. 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, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees,
legal and accounting fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understand-
ing the various costs that an investor in the Fund will bear directly or indi-
rectly. 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................................. $61 $85 $111 $185
Class B................................. 69 90 113 204
Class C................................. 29 60 103 222
Class Y................................. 8 26 46 101
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. 61 85 111 185
Class B................................. 19 60 103 204
Class C................................. 19 60 103 222
Class Y................................. 8 26 46 101
- ------------------------------------------------------------------------------
</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>
FINANCIAL HIGHLIGHTS
The following information for the two year period ended December 31, 1996 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The fol-
lowing information for the fiscal years ended December 31, 1986 through Decem-
ber 31, 1994 has been audited by other independent 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 incorpo-
rated by reference into the Statement of Additional Information.
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1) 1992(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $30.44 $19.10 $20.23 $15.47 $14.13
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.19) (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain
(loss) (1.50) 12.37 (1.00) 5.17 1.35
- --------------------------------------------------------------------------------
Total Income (Loss) From Opera-
tions (1.69) 12.10 (1.13) 5.09 1.34
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- --------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $28.11 $30.44 $19.10 $20.23 $15.47
- --------------------------------------------------------------------------------
TOTAL RETURN++ (5.81)% 63.48% (5.59)% 32.90% 9.48%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MIL-
LIONS) $ 237 $ 159 $ 101 $ 50 $ 0.2
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.17% 1.43% 1.49% 1.67% 1.51%+
Net investment loss (0.61) (1.05) (0.94) (0.46) (0.97)+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112% 211%
- --------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS(3) $ 0.06 $ 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) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1) 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $29.76 $18.82 $20.08 $15.47 $14.18
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.41) (0.37) (0.27) (0.20) (0.26)
Net realized and unrealized gain
(loss) (1.43) 12.07 (0.99) 5.14 1.55
- -------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.84) 11.70 (1.26) 4.94 1.29
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- -------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $27.28 $29.76 $18.82 $20.08 $15.47
- -------------------------------------------------------------------------------
TOTAL RETURN+ (6.44) 62.30% (6.27)% 31.93% 9.10%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $ 362 $ 171 $ 94 $ 138 $ 78
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.91% 2.04% 2.21% 2.34% 2.32%
Net investment (loss) (1.36) (1.61) (1.66) (1.13) (1.77)
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112% 211%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS(2) $ 0.06 $ 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) As of September, 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+ 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.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.82 $13.77 $12.04 $11.48 $13.02
- --------------------------------------------------------------------------------------------------
(0.07) 0.29 0.28 0.71++ (0.10)
4.46 (3.70) 1.96 0.70 (1.30)
- --------------------------------------------------------------------------------------------------
4.39 (3.41) 2.24 1.41 (1.40)
- --------------------------------------------------------------------------------------------------
-- (0.23) -- (0.30) (0.14)
(0.03) (0.02) (0.24) -- --
- --------------------------------------------------------------------------------------------------
(0.03) (0.54) (0.51) (0.85) (0.14)
- --------------------------------------------------------------------------------------------------
$14.18 $9.82 $13.77 $12.04 $11.48
- --------------------------------------------------------------------------------------------------
(24.71)% 18.60% 12.60% (10.91)% 7.05%
- --------------------------------------------------------------------------------------------------
$ 82 $ 76 $ 142 $ 170 $ 179
- --------------------------------------------------------------------------------------------------
2.31% 2.30% 2.34% 2.32% 2.09%
(0.74) 2.12 1.69 5.23 (0.63)
- --------------------------------------------------------------------------------------------------
379% 372% 228% 165% 148%
- --------------------------------------------------------------------------------------------------
-- -- -- -- --
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1)(2)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR $29.77 $18.82 $20.08 $22.62
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.41) (0.42) (0.25) (0.16)
Net realized and
unrealized gain (loss) (1.44) 12.13 (1.01) (2.05)
- -----------------------------------------------------------------
Total Income (Loss) From
Operations (1.85) 11.71 (1.26) (2.21)
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33)
Capital (0.36) -- -- --
- -----------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $27.28 $29.77 $18.82 $20.08
- -----------------------------------------------------------------
TOTAL RETURN++ (6.44)% 62.35% (6.27)% (9.77)%++
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 26 $ 9 $ 2 $ 0.2
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.90% 2.25% 2.15% 2.19%+
Net investment loss (1.34) (1.79) (1.60) (0.98)+
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112%
- -----------------------------------------------------------------
AVERAGE COMMISSIONS PAID
ON
EQUITY SECURITY
TRANSACTIONS(3) $ 0.06 $ 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
period, since use of the undistributed net investment income method does
not accord with results of operations.
(2) For the period from October 18, 1993 (inception date) to December 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ 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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1)(2)
- -----------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 28.99
- -----------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.08)
Net realized and unrealized gain (loss) (0.06)
- -----------------------------------------------------------------------
Total Income (Loss) From Operations (0.14)
- -----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28)
Capital (0.36)
- -----------------------------------------------------------------------
Total Distributions (0.64)
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 28.21
- -----------------------------------------------------------------------
TOTAL RETURN (0.75)%++
- -----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $93,938
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.82%+
Net investment loss (0.29)+
- -----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118%
- -----------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS $ 0.06
- -----------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(2) For the period from January 31, 1996 (inception date) to December 31, 1996.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
13
<PAGE>
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, includ-
ing 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 pro-
gress due to factors such as management change or development of new technolo-
gy, 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 and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, 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 "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions 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 Pro-
spectus and in the Statement of Additional Information are non-fundamental, so
that the Board of Directors may change them without shareholder approval. The
fundamental restrictions applicable to the Fund include a prohibition on (a)
purchasing a security if, as a result, more than 5% of the assets of the Fund
would be invested in the securities of the issuer (with certain exceptions) or
the Fund would own more than 10% of the outstanding voting securities of the
issuer, (b) investing more than 10% of the Fund's total assets in "illiquid"
securities (which includes repurchase agreements with more than seven days to
maturity), and (c) investing more than 25% of the Fund's total assets in the
securities of issuers in a particular industry (with exceptions for U.S. gov-
ernment securities and certain money market instruments).
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 oth-
ers, 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 Certifi-
cates"), 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. 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 par-
ty, including possible delays or restrictions upon the Fund's ability to dis-
pose 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
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the supervision of the Board of Directors, reviews on an ongoing basis to eval-
uate 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 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.
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 further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of cap-
ital 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 restric-
tions 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 ("il-
liquid assets") will not be acquired if such acquisition would cause the aggre-
gate value of illiquid assets and restricted securities to exceed 10% of the
Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, 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.
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
17
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify as a "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.
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
18
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 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 advi-
sors 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 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 Allocation 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, serv-
ice 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 con-
sider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. In addition, certain investors, including qualified retirement plans and
certain
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
other institutional investors, may purchase shares directly through First Data.
When purchasing shares of the Fund, investors must specify whether the purchase
is for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data are not subject to a mainte-
nance fee.
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. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants 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 shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, 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. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis, the mini-
mum 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 min-
imum investment requirements for Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, Directors or Trustees of any of the
Smith Barney Mutual Funds 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 First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
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 Sys-
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
tematic Investment Plan, Smith Barney or First Data is authorized, through pre-
authorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis, to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder'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 First Data. 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 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 of $500,000 or more 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 and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
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) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
(including retired Board Members and employees); the immediate families of such
persons (including the surviving spouse of a deceased Board Member or employ-
ee); and to a pension, profit-sharing or other benefit plan for such persons
and (ii) employees of members of the National Association of Securities Deal-
ers, 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 pur-
chase 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) purchase by 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, and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchase by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) purchases by investors participating
in a Smith Barney fee-based arrangement. 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 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.
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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 meet-
ing 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 crite-
ria 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 discre-
tion 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 pur-
chases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 pur-
chased 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 First Data 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%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data 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 that were purchased without an initial sales
charge but subject to a CDSC.
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 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
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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
Class B shares held under the Smith Barney 401(k) Programs as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs Pro-
gram."
<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 and Thereafter 0.00
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There also will be converted at that time such 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
Class B shares (other than Class B Dividend Shares) owned by the shareholder.
See "Prospectus Summary--Alternative Purchase Arrangements--Class B Shares Con-
version 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 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 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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder 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) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. 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 sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
40l(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of 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.
Any Participating Plan in the Smith Barney 401(k) Program, whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity to exchange all of
its Class C shares for Class A shares of the Fund; regardless of asset size, at
the end of the eighth year after the date the Participating Plan enrolled in
the Smith Barney 401(k) Program. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
enrollment date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once an exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Any Class C shares not converted will continue to be subject to the distribu-
tion fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing 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 Par-
ticipating 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 Participat-
ing 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 fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the 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.
28
<PAGE>
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.
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.
Growth and Income Funds
Concert Social Awareness Fund
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 Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++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 Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
29
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York 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 Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation 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 and Class B 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, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares may exchange Fund shares for Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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.
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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive class 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 deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund 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 main-
tain 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. Redemp-
tion 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 identi-
cal to the registration of the shares of the fund exchanged, no signature guar-
antee 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 describ-
ing the shares to be acquired. The Fund reserves the right to modify or discon-
tinue exchange privileges upon 60 days prior notice to shareholders.
31
<PAGE>
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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permit-
ted 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
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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting 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 5128
Westborough, Massachusetts 01581-5128
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. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or on a
written redemption request in excess of $2,000 must be guaranteed by an eligi-
ble guarantor institution such as a domestic bank, savings and loan institu-
tion, domestic credit union, member bank of the Federal Reserve System or mem-
ber firm of a national securities exchange. Written redemption requests of
$2,000 or less do not require a signature guarantee unless
32
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
more than one such redemption request is made in any 10-day period. 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. First Data may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until First Data
receives all required documents in proper form.
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 First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data 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 First Data 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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted 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 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 First Data 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.
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 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.
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 information regarding the automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial
Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, 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 involuntary liquidation.
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 histori-
cal earnings and are
34
<PAGE>
PERFORMANCE (CONTINUED)
not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC, is
derived from this total return which provides the ending redeemable value. Such
standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
Fund calculates current dividend return for each Class by annualizing the most
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 com-
position 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 Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments 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 AND ADMINISTRATOR--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 February 28, 1997 in excess
of $80 billion.
35
<PAGE>
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 invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers 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.
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.
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, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber 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 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 a
distribution fee. The fees are used by Smith Barney to pay its Financial Con-
sultants 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 print-
ing and mailing prospectuses to potential investors; payments to and expenses
of
36
<PAGE>
DISTRIBUTOR (CONTINUED)
Smith Barney Financial Consultants and other persons who provide support serv-
ices 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 promo-
tion 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 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 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.
First Data, 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
37
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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. Gen-
erally, shares of the Company will be voted on a Company-wide basis on all mat-
ters 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 print-
ing 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. Shareholders who do not want this consol-
idation to apply to their accounts should contact their Smith Barney Financial
Consultant or First Data.
38
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
SPECIAL
EQUITIES
FUND
388 Greenwich Street
New York, New York 10013
FD 0232 4/97
P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
Class Z Shares Only
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS April 30, 1997
Smith Barney
Special Equities Fund -- Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation by investing in a diversified portfolio of common stocks or secu-
rities convertible into or exchangeable for common stocks, primarily of sec-
ondary growth companies as identified by the Fund's investment adviser.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). 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 Pro-
spectus 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 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 and the Company is contained in a
Statement of Additional Information dated April 30, 1997 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 a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 8
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 8
- -------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 10
- -------------------------------------------------
PERFORMANCE 11
- -------------------------------------------------
MANAGEMENT OF THE FUND 11
- -------------------------------------------------
ADDITIONAL INFORMATION 12
- -------------------------------------------------
</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 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>
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.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75%
Other expenses 0.05%
- --------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.80%
</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
"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 in Class Z shares of
the Fund, assuming (1) 5.00% annual return
and (2) redemption at the end of each time
period: $ 8 $26 $44 $99
- -------------------------------------------------------------------------------
</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 REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two-year period ended December 31, 1996
has been audited in conjunction with the annual audits of the financial
statements of the Fund by KPMG Peat Marwick LLP, independent auditors. The
1996 financial statements and the independent auditors' report thereon appear
in the December 31, 1996 Annual Report to Shareholders.
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
1996(1) 1995(2)
- -----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $30.46 $26.49
- -----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.08) (0.06)
Net realized and unrealized gain (loss) (1.48) 4.79
- -----------------------------------------------------------
Total Income (Loss) From Operations (1.56) 4.73
- -----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76)
Capital (0.36) --
- -----------------------------------------------------------
Total Distributions (0.64) (0.76)
- -----------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.26 $30.46
- -----------------------------------------------------------
TOTAL RETURN (5.37)% 17.95%++
- -----------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $12,671 $5,364
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.80% 1.10%+
Net investment loss (0.24) (0.86)+
- -----------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113%
- -----------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $ 0.06
- -----------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average
shares method, which more appropriately presents per share data for this
year since use of the undistributed method did not accord with results of
operations.
(2) For the period from October 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>
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, includ-
ing 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 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 pro-
gress due to factors such as management change or development of new technolo-
gy, 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 and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, 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 "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions 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 Pro-
spectus and in the Statement of Additional Information are non-fundamental, so
that the Board of Directors may change them without shareholder approval. The
fundamental restrictions applicable to the Fund include a prohibition on (a)
purchasing a security if, as a result, more than 5% of the assets of the Fund
would be invested in the securities of the issuer (with certain exceptions) or
the Fund would own more than 10% of the outstanding voting securities of the
issuer, (b) investing more than 10% of the Fund's total assets in "illiquid"
securities (which includes repurchase agreements with more than seven days to
maturity), and (c) investing more than 25% of the Fund's total assets
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 oth-
ers, 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 Certifi-
cates"), 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. 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 par-
ty, including possible delays or restrictions upon the Fund's ability to dis-
pose 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
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 agree-
ments.
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.
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 further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of cap-
ital 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 restric-
tions 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 ("il-
liquid assets") will not be acquired if such acquisition would cause the aggre-
gate value of illiquid assets and restricted securities to exceed 10% of the
Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, 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.
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
8
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted 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 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.
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 capi-
tal assets in the shareholder's hands, and generally will be long-term or
short-term depending upon
9
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
the shareholder's holding period for the shares. Any loss realized by a share-
holder 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 distribu-
tions 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 plan docu-
ments and/or tax advisors for specific information on the tax consequences of
participating in a Qualified Plan.
PURCHASE, EXCHANGE 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 "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 a period of time. There are no minimum investment require-
ments 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."
Qualified Plans 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 Qual-
ified Plan should consult the terms of their respective plans for redemption
provisions.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
10
<PAGE>
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 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
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 per-
formance of mutual funds or other industry publications. the Fund will include
performance data for Class Z shares in any advertisement or information includ-
ing 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 agree-
ments 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.
11
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
INVESTMENT ADVISER AND ADMINISTRATOR-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 1968 and is a registered investment
adviser. SBMFM renders investment advice to a wide variety of investment com-
pany client, which had aggregate assets under management as of February 28,
1997, in excess of $80 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 invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers 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.
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.
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, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber listed on page one of this Prospectus.
DISTRIBUTOR-SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
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,
12
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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 alloca-
ble exclusively to each Class; (e) voting rights on matters exclusively affect-
ing a single Class; (f) the exchange privilege of each Class; and (g) the con-
version feature of the Class B shares. The Board of Directors does not antici-
pate 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 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 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 print-
ing 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 their Smith
Barney Financial Consultants or the Fund's transfer agent.
PNC Bank, located at 17th and Chestnut Streets Philadelphia, PA 19103, serves
as custodian of the Fund's investments.
First Data Investor Services Group, Inc., formerly known as The Shareholder
Services Group, Inc., located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent.
13
<PAGE>
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14
<PAGE>
SMITH BARNEY
----------------------------------
A Member of TravelersGrouop [LOGO]
SMITH BARNEY
SPECIAL
EQUITIES
FUND
388 Greenwich Street
New York, New York 10013
FD 1009 4/97
Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
April 30, 1997
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 30, 1997, 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, is 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.....................................
................................ 5
Purchase of Shares 22
Redemption of Shares 22
Distributor 23
Valuation of Shares 26
Exchange Privilege 26
Performance Data (See in the Prospectus
"Performance") 27
Taxes (See in the Prospectus "Dividends,
Distributions and Taxes") 31
Additional Information 34
Financial Statements 35
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
PFS Distributors, Inc.("PFS")
.....................................
Smith Barney Mutual Funds Management
Inc. ("SBMFM")
Distributor (Growth Opportunity
Fund and Investment Grade Bond
Fund)
Investment Adviser and
Administrator
PNC Bank, National Association ("PNC")
Custodian
First Data Investor Services Group, Inc.
("First Data") ......
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 56). 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 73). Private
investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman, Director (Age 65).
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 59).
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 and
Investment Officer. Vice President of
Investment Funds of Travelers Group Inc. His
address is 388 Greenwich Street, New York, NY
10013.
Frank G. Hubbard, Director (Age 61). 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
80). 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 63). 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. Mr. McLendon is a
director of 41 investment companies
associated with Smith Barney. His address is
388 Greenwich Street, New York, New York
10013.
Ken Miller, Director (Age 55). President of
Young Stuff Apparel Group, Inc. His address
is 1411 Broadway, New York, New York 10018.
John F. White, Director (Age 79). 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 37).
Executive Vice President of Smith Barney;
prior to 1994, Director of Sales and
Marketing for Prudential Mutual Funds. Ms.
Bibliowicz serves as President of 40
investment companies associated with Smith
Barney. Her address is 388 Greenwich Street,
New York, New York 10013.
James Conroy, Vice President and Investment
Officer. Managing Director of Smith Barney.
His address is 388 Greenwich Street, New
York, New York 10013.
Douglas H. Johnson, Vice President and
Investment Officer. 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., Vice President and
Investment Officer. 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, Vice Presiddent and
Investment Officer. 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, Senior Vice President and
Treasurer (Age 39). Director and Senior Vice
President of SBMFM. Mr. Daidone serves as
Senior Vice President and Treasurer of 41
investment companies associated with Smith
Barney. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary (Age 46).
Managing Director of Smith Barney and
Secretary of SBMFM; General Counsel and
Secretary of SBMFM. Ms. Sydor serves as
Secretary of 41 investment companies
associated with Smith Barney. 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,
1997, 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, 1996,
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)
$28,600.00
$52,475.00
Herbert Barg (20)
28,600.00
105,175.00
Alger B. Chapman (9)
26,000.00
76,775.00
Dwight B. Crane (26)
26,100.00
140,375.00
Frank G. Hubbard (5)
28,600.00
52,475.00
Heath McLendon (41)
N/A
N/A
Ken Miller (5)
26,100.00**
49,475.00
John F. White (5)
28,500.00**
52,375.00
Allan G. Johnson
(5)(*)
18,035.51
33,125.00
+ Number of funds for which director
serves within fund complex
* Director Emeritus
** Mr. Miller and Mr. White have deferred
$6,500 and $26,000, respectively, of
compensation from the Company in 1996.
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 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 25, 1996. 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, 1994,
1995 and 1996, the Funds accrued advisory
fees as follows:
Fund
1994
1995
1996
Investment Grade Bond Fund
$1,926,359
$2,067,222
$2,198,162
Government Securities Fund
2,578,209
2,287,647
1,979,639
Special Equities Fund
1,052,635
1,276,355
3,094,925
Managed Growth Fund
N/A
2,022,754
6,034,652
Growth Opportunity Fund
N/A
390,902
1,040,355
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, 1994, 1995 and 1996, these Funds
paid administrative fees to Boston Advisors
or SBMFM as follows:
Boston
Advisors
SBMFM
Fund
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 Ended
12/31/95
For the
Fiscal
Year Ended
12/31/96
Investment Grade Bond Fund
$ 290,859
$ 565,300
$918,76
5
$ 976,938
Government Securities Fund
500,505
972,757
1,307,2
22
1,131,222
Special Equities Fund
130,039
252,737
464,129
1,125,428
Counsel and Auditors
Willkie Farr & Gallagher L.L.P.serves as
counsel to the Company. The Directors who
are not "interested persons" of the Company
have selected Stroock & Stroock & Lavan LLP
as their legal counsel.
KPMG Peat Marwick LLP, 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, 1997.
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.
Repurchase Agreements. As described in the
applicable Prospectus, each Fund may enter
into repurchase agreements. A repurchase
agreement is a contract under which a Fund
acquires a security for a relatively short
period (usually not more than one week)
subject to the obligation of the seller to
repurchase and the Fund to resell such
security at a fixed time and price
(representing the Fund's cost plus interest).
It is each Fund's present intention to enter
into repurchase agreements only upon receipt
of fully adequate collateral and only with
commercial banks (whether U.S. or foreign)
and registered broker-dealers. Repurchase
agreements may also be viewed as loans made
by a Fund which are collateralized primarily
by the securities subject to repurchase. A
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. Pursuant to policies established
by the Board of Directors, SBMFM monitors the
creditworthiness of all issuers with which
each Fund enters into repurchase agreements.
Reverse Repurchase Agreements. Each Fund may
enter into reverse repurchase agreements. A
reverse repurchase agreement involves the
sale of a money market instrument held by a
Fund coupled with an agreement by a Fund to
repurchase the instrument at a stated price,
date and interest payment. A 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.
A 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. 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 a Fund's total assets (less all of its
liabilities other than obligations under such
agreements).
A 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.
Warrants. All Funds except the Government
Securities Fund may purchase warrants. A
warrant is a security that gives the holder
the right, but not the obligation, to
subscribe for newly created securities of the
issuer at a fixed price either at a certain
date or during a set period. The Investment
Grade Bond Fund and the Special Equities Fund
will not invest in warrants if, as a result
of such investment, the value of their
investments in warrants, valued at the lower
of cost or market, exceeds 5% of the value of
the Fund's net assets. Included in this 5%
limitation, 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 either Fund and may
be changed by the Board of Directors without
shareholder approval.
Short Sales Against the Box. Each Fund may
sell securities short "against the box" which
means that 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.
Firm Commitment Agreements and When-Issued
Purchases. The Government Securities Fund,
Investment Grade Bond Fund and Growth
Opportunity Fund may enter into firm
commitment agreements and purchase when-
issued securities, as decribed more fully in
each Fund's Prospectus. Firm commitment
agreements and when-issued purchases involve
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. 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 a Fund is
obligated to purchase such securities, it
will maintain in a segregated account with
the Company's custodian, eligible segregated
assets (as defined in each Fund's Prospectus)
equal to the aggregate current value
sufficient to make payment for the
securities. The Government Securities Fund
and Investment Grade Bond Fund will not enter
into such agreements for the purpose of
investment leverage
Lending Portfolio Securities. Each 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 a Fund's
total assets taken at value. A Fund will not
lend its 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, a 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, a 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 a 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. 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, a 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 a Fund.
Exchange Rate-Related U.S. Government
Securities. The Government Securities 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.
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.
Leverage Through Borrowing. The 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 Risks Involving Investments in
Smaller, Newer Companies. The Special
Equities Fund invests primarily in equity
securities of secondary companies that have
yet to reach a fully mature stage of earnings
growth. 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. 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 the 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.
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 0.5 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,
Special
Equities
Fund
Managed
Growth
Fund
Growth
Opportuni
ty
Fund
Total Brokerage
Commissions
1994
$217,269
N/A
N/A
1995
$56,735
$164,975
$201,706
1996
$378,451
$1,272,7
02
$716,937
Commissions paid to
Smith Barney
1994
$14,280
N/A
N/A
1995
$11,052
$140,970
$650
1996
$47,100
$166,656
$21,6
80
% of Total Brokerage
Commissions paid to
Smith Barney
1996
12.4%
13.1%
3.0%
% of Total
Transactions
Involving
Commissions paid
to Smith Barney
1996
7.3%
11.5%
3.0%
____________________
_
No commissions were paid by the Investment
Grade Bond Fund and Goverment Securites 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, 1995
and 1996, the portfolio turnover rates were
as follows:
Fund
1995
1996
Investment Grade Bond Fund
49%
48%
Government Securities Fund
294%
420%
Special Equities Fund
113%
118%
Managed Growth
Fund..................................
.....................
6%
34%
Growth Opportunity
Fund..................................
.................
0%
183%
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 not taxed
currently on accumulations in their
accounts).
SBMFM manages a number of private investment
accounts on a discretionary basis and it is
not bound by the recommendations of the Smith
Barney 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 the 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 $50 may be made under
the Withdrawal Plan by redeeming as many
shares of a Fund as may be necessary to cover
the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts
withdrawn by shareholders that exceed 1.00%
per month of the value of a shareholder's
shares at the time the Withdrawal Plan
commences. 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 First Data 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 First Data may continue to do so and
applications for participation in the
Withdrawal Plan must be received by First
Data 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.
DISTRIBUTORS
Smith Barney serves as the Company's
distributor on a best efforts basis pursuant
to a distribution agreement (the
"Distribution Agreement") which was most
recently approved by the Company's Board of
Directors on July 25, 1996.
PFS serves as one of the Company's
distributors with respect to the Growth
Opportunity Fund and Investment Grade Bond
Fund pursuant to a Distribution Agreement
which was most recently approved by the
Company's Board of Directors on July 25,
1996.
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, 1996,
Smith Barney incurred distribution expenses
totaling approximately $11,195,985,
consisting of approximately $834,786 for
advertising, $82,862 for printing and mailing
of Prospectuses, $6,683,975 for support
services, $14,110,451 to Smith Barney
Financial Consultants, and $850,755 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.
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 with respect to the Class
B shares of Growth Opportunity Fund and
Investment Grade Bond Fund, PFS, 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 its Financial
Consultants and Registered Representatives,
respectively, 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.
Class A
Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 114,571
$ 181,000
$ 182,000
Government Securities Fund
66,217
63,000
65,000
Special Equities Fund
186,104
347,000
1,800,000
Managed Growth
Fund.......................
........
N/A
5,400,000
1,700,000
Growth Opportunity
Fund.......................
....
N/A
18,000
18,000
CDSC paid to Smith Barney.
Class B
Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 556,007
$ 541,000
$422,000
Government Securities Fund
629,700
512,000
305,000
Special Equities Fund
288,013
379,000
658,000
Managed Growth
Fund.......................
........
N/A
174,000
1,112,000
Growth Opportunity
Fund.......................
...
N/A
N/A
3,000
Class C
Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
N/A
$ 5,000
$1,000
Government Securities Fund
N/A
1,000
0
Special Equities Fund
N/A
1,000
22,000
Managed Growth
Fund.......................
........
N/A
10,000
27,000
Growth Opportunity
Fund.......................
....
N/A
N/A
1,000
Service Fees
Class A
Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 147,152
$ 505,094
$ 524,533
Government Securities Fund
334,848
1,212,522
1,026,748
Special Equities Fund
147,488
286,910
525,204
Managed Growth
Fund.......................
........
N/A
189,955
495,536
Growth Opportunity
Fund.......................
...
N/A
63,606
162,606
Class B
Name of Fund
Fiscal Year
Ended
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
.
$ 922,038
$ 638,293
$ 662,187
Government Securities Fund .
1,505,763
419,433
340,572
Special Equities Fund .
329,007
283,978
696,750
Managed Growth
Fund.......................
........
N/A
351,874
1,024,802
Growth Opportunity
Fund.......................
...
N/A
34,096
96,931
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 1,009
$ 5,068
$14,456
Government Securities Fund
967
2,078
3,050
Special Equities Fund
1,975
8,675
56,094
Managed Growth
Fund.......................
........
N/A
47,170
141,702
Growth Opportunity
Fund.......................
...
N/A
23
552
Distribution Fees
Class B
Name of Fund
Fiscal Year
Ended
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 1,844,077
$ 1,276,588
$ 1,324,350
Government Securities Fund
3,011,526
838,868
681,144
Special Equities Fund
987,022
851,933
2,090,250
Managed Growth
Fund.......................
........
N/A
1,055,621
3,074,405
Growth Opportunity
Fund.......................
....
N/A
102,289
290,792
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund
$ 1,958
$ 9,124
$ 26,020
Government Securities Fund
1,893
3,741
5,491
Special Equities Fund
5,927
26,026
168,282
Managed Growth
Fund.......................
........
N/A
141,508
425,107
Growth Opportunity
Fund.......................
....
N/A
71
1,657
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 Directors'
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 Registered Representative or 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. 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.
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 or Registered Representative of
PFS Investments Inc..
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 (minus) bcd + 1)6 (minus) 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, 1996
Inception*
Through December 31,
1996
Investment Grade Bond Fund
(4.92)%
9.02%
Government Securities Fund
(2.62)%
5.15%
Special Equities Fund
(10.51)%
18.36%
Managed Growth Fund
10.54%
7.94%
Growth Opportunity Fund **
8.28%
14.44%
__________________
* The Investment Grade Bond, Government
Securities and Special Equities 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,
1996
Five Year
Period Ended
December 31,
1996
Ten Year
Period Ended
December 31,
1996(1)
Inception
Through
December 31,
1996
Investment Grade Bond
Fund
(5.07)%
9.11%
8.83%
11.39%
Government Securities
Fund
(2.89)%
5.26%
6.50%
8.04%
Special Equities Fund
(11.03)%
15.31%
10.26%
10.55%
Managed Growth Fund
10.55%
N/A
N/A
8.30%
Growth Opportunity
Fund **
8.12%
N/A
N/A
15.14%
__________________
(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.
** 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 average annual total returns were
as follows for the periods indicated:
Name of Fund
One Year
Period Ended
12/31/96
Inception
Through 12/31/96
Investment Grade Bond Fund (1)
(1.76)%
7.83%
Government Securities Fund (2)
0.52%
4.87%
Special Equities Fund (3)
(7.38)%
8.11%
Managed Growth Fund (4)
14.45%
10.83%
Growth Opportunity Fund (5)
.............
12.24%
15.98%
__________________
(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:
AGGREGATE TOTAL RETURN =
ERV(minus)P
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,
1996**
Period from
Inception
through
December 31,
1996**
One Year
Period Ended
December 31,
1996***
Period from
Inception
through
December 31,
1996***
Investment Grade
Bond Fund
(0.47)%
49.96%
(4.92)%
43.21%
Government
Securities Fund
1.96%
29.01%
(2.62)%
23.21%
Special Equities
Fund
(5.81)%
111.55%
(10.51)%
101.02%
Managed Growth Fund
16.33%
18.12%
10.54%
12.22%
Growth Opportunity
Fund****
13.96%
50.83%
8.28%
43.31%
__________________
* The Investment Grade Bond 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
Dec.
31,
1996*
Five
Year
Period
Ended
Dec.
31,
1996*
Ten
Year
Period
Ended
Dec.
31,
1996*
Period
from
Incepti
on
through
Dec.
31,
1996*
One Year
Period
Ended
Dec. 31,
1996**
Five
Year
Period
Ended
Dec. 31,
1996**
Ten Year
Period
Ended
Dec. 31,
1996**(1)
Period
from
Inception
through
Dec. 31,
1996**
Investment
Grade
Bond Fund
(0.89)%
54.64%
133.15%
441.23%
(5.07)%
53.64%
133.15%
441.23%
Government
Securities
Fund
1.42%
30.23%
87.74%
168.75%
(2.89)%
29.23%
87.74%
168.75%
Special
Equities
Fund
(6.44)%
104.83%
165.64%
309.77%
(11.03)%
103.83%
165.64%
309.77%
Managed
Growth
Fund
15.55%
N/A
N/A
16.79%
10.55%
N/A
N/A
12.79%
Growth
Opportunity
Fund***
13.12%
N/A
N/A
48.68%
8.12%
N/A
N/A
45.07%
__________________
* 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
Dec. 31,
1996**
Period from
Inception*
through
Dec.
31,1996**
One Year
Period Ended
Dec. 31,
1996***
Period from
Inception*
through
Dec. 31,
1996***
Investment Grade Bond
Fund
(0.83)%
33.62%
(1.76)%
33.62%
Government Securities
Fund
1.47%
20.41%
0.52%
20.41%
Special Equities Fund
(6.44)%
28.40%
(7.38)%
28.40%
Managed Growth Fund
15.45%
16.79%
14.45%
16.79%
Growth Opportunity Fund
13.24%
23.07%
12.24%
23.07%
__________________
* 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.
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
a 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
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.
First Data located at Exchange Place, Boston,
Massachusetts 02109, serves as the Company's
transfer agent. For these services, First
Data receives a monthly fee computed on the
basis of the number of shareholder accounts
it maintains with 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, 1996 are
incorporated herein by reference in their
entirety.
APPENDIX
BOND (AND NOTE) RATINGS
Moody's Investors Service, Inc. ("Moody's")
Aaa - Bonds that are rated "Aaa" are
judged to be of the best quality. They carry
the smallest degree of investment risk and
are generally referred to as "gilt edge."
Interest payments are protected by a large or
by an exceptionally stable margin and
principal is secure. While the various
protective elements are likely to change,
such changes as can be visualized are most
unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated "Aa" are
judged to be of high quality by all
standards. Together with the "Aaa" group
they comprise what are generally known as
high grade bonds. They are rated lower than
the best bonds because margins of protection
may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of
greater amplitude or there may be other
elements present that make the long term
risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that are rated "A" 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 that
suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated "Baa" 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.
Ba - Bonds that are rated Ba are judged
to have speculative elements; their future
cannot be considered as well assured. Often
the protection of interest and principal
payments may be very moderate and thereby not
well safeguarded during both good and bad
times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds that are rated B generally
lack characteristics of desirable
investments. Assurance of interest and
principal payments or of maintenance of other
terms of the contract over any long period of
time may be small.
Caa - Bonds that are rated Caa are of
poor standing. These issues may be in
default or present elements of danger may
exist with respect to principal or interest.
Ca - Bonds that are rated Ca represent
obligations which are speculative in a high
degree. Such issues are often in default or
have other marked short-comings.
C - Bonds that are rated C are the
lowest rated class of bonds, and issues so
rated can be regarded as having extremely
poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers
1, 2 and 3 in each generic rating
classification from Aa through B. The
modifier 1 indicates that the security ranks
in the higher end of its generic rating
category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Ratings Group ("Standard &
Poors")
AAA - Debt rated "AAA" has the highest
rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated "AA" has a very strong
capacity to pay interest and repay principal
and differs from the highest rated issues
only in small degree.
A - Debt rated "A" has a strong
capacity to pay interest and repay principal
although it is somewhat more susceptible to
the adverse effects of changes in
circumstances and economic conditions than
debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as
having an adequate capacity to pay interest
and repay principal. Whereas it normally
exhibits adequate protection parameters,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity to pay interest and repay
principal for debt in this category than in
higher rated categories.
BB, B and CCC - Bonds rated BB and B
are regarded, on balance, as predominantly
speculative with respect to capacity to pay
interest and repay principal in accordance
with the terms of the obligation. BB
represents a lower degree if speculation than
B and CCC the highest degree of speculation.
While such bonds will likely have some
quality and protective characteristics, these
are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C - The rating C is reserved for income
bonds on which no interest is being paid.
D - Bonds rated D are in default, and
payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by
the addition of a plus or a minus sign, which
is used to show relative standing within the
major rating categories, except in the AAA
category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related
supporting institutions) have a superior
capacity for repayment of short-term
promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the
following characteristics: leading market
positions in well-established industries;
high rates of return on funds employed;
conservative capitalization structures with
moderate reliance on debt and ample asset
protection; broad margins in earnings
coverage of fixed financial charges and high
internal cash generation; well-established
access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related
supporting institutions) have a strong
capacity for repayment of short-term
promissory obligations. This will normally
be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will
be more subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that
the degree of safety regarding timely payment
is either overwhelming or very strong. Those
issues determined to possess overwhelming
safety characteristics will be denoted with a
plus (+) sign designation.
A-2 - Capacity for timely payment on
issues with this designation is strong.
However, the relative degree of safety is not
as high as for issues designated A-1.
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.
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, 1996
and the reports of Independent
Accounts are incorporated by reference to the definitive 30b2-1 filed on
March 10, 1997 as accession number
91155-97-000133.
(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
reference to Post-Effective Amendment No. 37 to the Registration Statement
filed on November 7, 1994 ("Post Effective Amendment No. 37").
(2) Registrant's By-Laws, as amended on September 30, 1992 are incorporated
by reference to Post-Effective Amendment No. 30 to the Registration Statement
filed on April 30, 1993.
(3) Not Applicable.
(4) Registrant's form of stock certificate for Class A, Class B and Class D
are incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on October 23, 1992.
(5) (a) Investment Advisory Agreement dated July 30, 1993, between the
Registrant on behalf of Smith Barney 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 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) 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 Custodian Agreement with PNC Bank, National Association will be filed
herewith.
9 (a) 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").
(b) 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. 40 filed on
June 27, 1995.
(10) Opinion of Robert A. Vegliante, Deputy General Counsel of
Smith Barney Mutual Funds
Management Inc. filed with the Registrant's rule 24-f2 Notice
(Accession No. 000091155-97-000104)
is incorporated by reference.
(11) Consent of KPMG Peat Marwick LLP is filed herewith.
(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) Financial Data Schedule is filed herewith.
(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 April 15, 1997 Title of Class
Common Stock par value
$.001 per share Class A Class B Class C
Class Y Class Z
Special Equities
Fund 28,211 45,056 3,221 5 1
Investment Grade
Bond Fund 14,027 14,232 373 4
Government
Securities Fund 24,730 7,483 91
9
Growth Opportunity 10,896 6644 19 0
Fund
Managed Growth
Fund 18,053 42,514 5,221
7 1
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-
Effective Amendment No. 1 to the registration statement filed on Form N-14
on October 8, 1993 (File No. 33-50153).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - 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., 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 Municipal Money Market 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 28th day of April, 1997.
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 04/28/97
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone* Senior Vice President
Lewis E. Daidone and Treasurer 04/28/97
(Chief Finacial
and Accounting Officer)
/s/ Paul R. Ades * Director 04/28/97
Paul R. Ades
/s/ Herbert Barg* Director 04/28/97
Herbert Barg
/s/ Alger B. Chapman* Director 04/28/97
Alger B. Chapman
/s/ Dwight B. Crane* Director 04/28/97
Dwight B. Crane
/s/ Frank Hubbard* Director 04/28/97
Frank Hubbard
/s/ Ken Miller* Director 04/28/97
Ken Miller
/s/ John F. White* Director 04/28/97
John F. White
*Signed by Heath B. McLendon, their duly authorized attorney-in-
fact, pursuant to power of attorney dated November 3, 1994.
/s/ Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibits
8 PNC Agreement
11(b) Consent of KPMG
17 Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We consent to the use of our reports, with respect to the funds
indicated 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
Date of Auditors' Report
Smith Barney Investment Grade Bond Fund
February 18, 1997
Smith Barney Special Equities Fund
February 18, 1997
Smith Barney Government Securities Fund
February 11, 1997
Smith Barney Growth Opportunity Fund
February 5, 1997
Smith Barney Managed Growth Fund
February 11, 1997
KPMG Peat Marwick
LLP
New York, New York
April 24, 1997
CUSTODY AGREEMENT
Agreement made as of this day of , 1994,
between Smith Barney
Ivestment Funds Inc., a corporation organized
and existing under the laws of the State of Maryland, having its
principal office and place of business at 388 Greenwich Street, New York,
NY 10013 (hereinafter called the "Fund"), and
PNC Bank, National Association
Pennsylvania corporation authorized to do banking business, hav-
ing its principal office and place of business at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103 (hereinafter called the
"Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises
hereinafter set forth, the Fund and the Custodian agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency securities, its successor or successors and its
nominee or nominees.
2. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this
Agreement to be given to the Custodian which is actually
received by the Custodian and signed on behalf of the Fund by
any two Officers, and the term Certificate shall also include
instructions by the Fund to the Custodian communicated by a
Terminal Link.
4. "Clearing Member" shall mean a registered
broker-dealer which is a clearing member under the rules of
O.C.C. and a member of a national securities exchange
qualified to act as a custodian for an investment company, or
any broker-dealer reasonably believed by the Custodian to be
such a clearing member.
5. "Collateral Account" shall mean a segregated account
so denominated which is specifically allocated to a Series and
pledged to the Custodian as security for, and in consideration
of, the Custodian's issuance of (a) any Put Option guarantee
letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII
herein.
6. "Covered Call Option" shall mean an exchange traded
option entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase from
the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer
thereof and subject to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and
Exchange Commission, its successor or successors and its
nominee or nominees. The term "Depository" shall further mean
and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identi-
fied in a certified copy of a resolution of the Fund's Board
of Trustees specifically approving deposits therein by the
Custodian.
8. "Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
without limitation, U.S. Treasury Bills, U.S. Treasury Notes,
U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified
month at an agreed upon price.
9. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with
respect to a Futures Contract.
11. "Margin Account" shall mean a segregated account in
the name of a broker, dealer, futures commission merchant, or
a Clearing Member, or in the name of the Fund for the benefit
of a broker, dealer, futures commission merchant, or Clearing
Member, or otherwise, in accordance with an agreement between
the Fund, the Custodian and a broker, dealer, futures commis-
sion merchant or a Clearing Member (a "Margin Account Agree-
ment"), separate and distinct from the custody account, in
which certain Securities and/or money of the Fund shall be
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deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time
determine. Securities held in the Book-Entry System or the
Depository shall be deemed to have been deposited in, or
withdrawn from, a Margin Account upon the Custodian's effect-
ing an appropriate entry in its books and records.
12. "Money Market Security" shall be deemed to include,
without limitation, certain Reverse Repurchase Agreements,
debt obligations issued or guaranteed as to interest and
principal by the government of the United States or agencies
or instrumentalities thereof, any tax, bond or revenue
anticipation note issued by any state or municipal government
or public authority, commercial paper, certificates of deposit
and bankers' acceptances, repurchase agreements with respect
to the same and bank time deposits, where the purchase and
sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or successors,
and its nominee or nominees.
14. "Officers" shall be deemed to include the President,
any Vice President, the Secretary, the Clerk, the Treasurer,
the Controller, any Assistant Secretary, any Assistant Clerk,
any Assistant Treasurer, and any other person or persons,
whether or not any such other person is an officer of the
Fund, duly authorized by the Board of Trustees of the Fund to
execute any Certificate, instruction, notice or other instru-
ment on behalf of the Fund and listed in the Certificate an-
nexed hereto as Appendix A or such other Certificate as may be
received by the Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Op-
tion, Stock Index Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Officer or from a
person reasonably believed by the Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and tender of the specified
underlying Securities, to sell such Securities to the writer
thereof for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agree-
ment pursuant to which the Fund sells Securities and agrees to
repurchase such Securities at a described or specified date
and price.
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19. "Security" shall be deemed to include, without
limitation, Money Market Securities, Call Options, Put Op-
tions, Stock Index Options, Stock Index Futures Contracts,
Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse
Repurchase Agreements, common stocks and other securities hav-
ing characteristics similar to common stocks, preferred
stocks, debt obligations issued by state or municipal govern-
ments and by public authorities, (including, without limita-
tion, general obligation bonds, revenue bonds, industrial
bonds and industrial development bonds), bonds, debentures,
notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidenc-
ing or representing any other rights or interest therein, or
any property or assets.
20. "Senior Security Account" shall mean an account
maintained and specifically allocated to a Series under the
terms of this Agreement as a segregated account, by recorda-
tion or otherwise, within the custody account in which certain
Securities and/or other assets of the Fund specifically al-
located to such Series shall be deposited and withdrawn from
time to time in accordance with Certificates received by the
Custodian in connection with such transactions as the Fund may
from time to time determine.
21. "Series" shall mean the various portfolios, if any,
of the Fund as described from time to time in the current and
effective prospectus for the Fund and listed on Appendix B
hereto as amended from time to time.
22. "Shares" shall mean the shares of beneficial inter-
est of the Fund, each of which is, in the case of a Fund hav-
ing Series, allocated to a particular Series.
23. "Stock Index Futures Contract" shall mean a
bilateral agreement pursuant to which the parties agree to
take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the value
of a particular stock index at the close of the last business
day of the contract and the price at which the futures
contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded
option entitling the holder, upon timely exercise, to receive
an amount of cash determined by reference to the difference
between the exercise price and the value of the index on the
date of exercise.
25. "Terminal Link" shall mean an electronic data
transmission link between the Fund and the Custodian requiring
in connection with each use of the Terminal Link by or on
behalf of the Fund use of an authorization code provided by
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the Custodian and at least two access codes established by the
Fund.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the
Custodian as custodian of the Securities and moneys at any
time owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as
hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, the Fund will deliver or cause to
be delivered to the Custodian all Securities and all moneys
owned by it, at any time during the period of this Agreement,
and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The
Custodian shall segregate, keep and maintain the assets of the
Series separate and apart. The Custodian will not be
responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any
credits made on the Fund's behalf where such credits have been
previously made and moneys are not finally collected. The
Fund shall deliver to the Custodian a certified resolution of
the Board of Trustees of the Fund, substantially in the form
of Exhibit A hereto, approving, authorizing and instructing
the Custodian on a continuous and on-going basis to deposit in
the Book-Entry System all Securities eligible for deposit
therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to
the extent possible in connection with its performance
hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of
Securities and deliveries and returns of Securities col-
lateral. Prior to a deposit of Securities specifically al-
located to a Series in the Depository, the Fund shall deliver
to the Custodian a certified resolution of the Board of
Trustees of the Fund, substantially in the form of Exhibit B
hereto, approving, authorizing and instructing the Custodian
on a continuous and ongoing basis until instructed to the
contrary by a Certificate actually received by the Custodian
to deposit in the Depository all Securities specifically al-
located to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to
such Securities in connection with its performance hereunder,
- 5 -
including, without limitation, in connection with settlements
of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities
and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only
assets held by the Custodian for customers, including, but not
limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically
allocated on the Custodian's books to the separate account for
the applicable Series. Prior to the Custodian's accepting,
utilizing and acting with respect to Clearing Member confirma-
tions for Options and transactions in Options for a Series as
provided in this Agreement, the Custodian shall have received
a certified resolution of the Fund's Board of Trustees,
substantially in the form of Exhibit C hereto, approving,
authorizing and instructing the Custodian on a continuous and
on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept,
utilize and act in accordance with such confirmations as
provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate
accounts, in the name of each Series, and shall credit to the
separate account for each Series all moneys received by it for
the account of the Fund with respect to such Series. Money
credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name
and address of the person to whom the payment is to be made,
the Series account from which payment is to be made and the
purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of
the expenses and liabilities of the Custodian attributable to
such Series.
3. Promptly after the close of business on each day,
the Custodian shall furnish the Fund with confirmations and a
summary, on a per Series basis, of all transfers to or from
the account of the Fund for a Series, either hereunder or with
any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are
transferred to the account of the Fund for a Series, the
Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a
fungible bulk of Securities registered in the name of the
Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series
basis, of the Securities and moneys held by the Custodian for
the Fund.
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4. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, all Securities held by the
Custodian hereunder, which are issued or issuable only in
bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that
form; all other Securities held hereunder may be registered in
the name of the Fund, in the name of any duly appointed
registered nominee of the Custodian as the Custodian may from
time to time determine, or in the name of the Book-Entry
System or the Depository or their successor or successors, or
their nominee or nominees. The Fund agrees to furnish to the
Custodian appropriate instruments to enable the Custodian to
hold or deliver in proper form for transfer, or to register in
the name of its registered nominee or in the name of the
Book-Entry System or the Depository any Securities which it
may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold
all such Securities specifically allocated to a Series which
are not held in the Book-Entry System or in the Depository in
a separate account in the name of such Series physically
segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and
unless otherwise instructed to the contrary by a Certificate,
the Custodian by itself, or through the use of the Book-Entry
System or the Depository with respect to Securities held
hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with
preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount pay-
able upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the
publications listed in Appendix C annexed hereto, which may be
amended at any time by the Custodian without the prior
notification or consent of the Fund;
(c) Present for payment and collect the amount pay-
able upon all Securities which mature;
(d) Surrender Securities in temporary form for
definitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System
or the Depository with respect to Securities therein
deposited, for the account of a Series, all rights and similar
- 7 -
securities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry
System or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of the
Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in
exchange for other Securities or cash issued or paid in con-
nection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege and receive and
hold hereunder specifically allocated to such Series any cash
or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any
protective committee, reorganization committee or other person
in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically al-
located to such Series such certificates of deposit, interim
receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets
of the Series specified in such Certificate, and take such
other steps as shall be stated in such Certificate to be for
the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) Present for payment and collect the amount pay-
able upon Securities not described in preceding paragraph 5(b)
of this Article which may be called as specified in the
Certificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain posses-
sion of any instrument or certificate representing any Futures
Contract, any Option, or any Futures Contract Option until
after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments
or certificates are available. The Fund shall deliver to the
Custodian such a Certificate no later than the business day
preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall
- 8 -
comply with Section 17(f) of the Investment Company Act of
1940, as amended, in connection with the purchase, sale,
settlement, closing out or writing of Futures Contracts, Op-
tions, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian
in connection with any such purchase, sale, writing, settle-
ment or closing out upon its receipt from a broker, dealer, or
futures commission merchant of a statement or confirmation
reasonably believed by the Custodian to be in the form
customarily used by brokers, dealers, or future commission
merchants with respect to such Futures Contracts, Options, or
Futures Contract Options, as the case may be, confirming that
such Security is held by such broker, dealer or futures com-
mission merchant, in book-entry form or otherwise, in the name
of the Custodian (or any nominee of the Custodian) as
custodian for the Fund, provided, however, that notwithstand-
ing the foregoing, payments to or deliveries from the Margin
Account and payments with respect to Securities to which a
Margin Account relates, shall be made in accordance with the
terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this
Agreement to the contrary, make payment for any Futures
Contract, Option, or Futures Contract Option for which such
instruments or such certificates are available only against
the delivery to the Custodian of such instrument or such
certificate, and deliver any Futures Contract, Option or
Futures Contract Option for which such instruments or such
certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or
certificate delivered to the Custodian shall be held by the
Custodian hereunder in accordance with, and subject to, the
provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Fund, other than a purchase of an Option, a Futures Contract,
or a Futures Contract Option, the Fund shall deliver to the
Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, a Certificate, and (ii)
with respect to each purchase of Money Market Securities, a
Certificate or Oral Instructions, specifying with respect to
each such purchase: (a) the Series to which such Securities
are to be specifically allocated; (b) the name of the issuer
and the title of the Securities; (c) the number of shares or
the principal amount purchased and accrued interest, if any;
(d) the date of purchase and settlement; (e) the purchase
price per unit; (f) the total amount payable upon such
purchase; (g) the name of the person from whom or the broker
- 9 -
through whom the purchase was made, and the name of the
clearing broker, if any; and (h) the name of the broker to
whom payment is to be made. The Custodian shall, upon receipt
of Securities purchased by or for the Fund, pay to the broker
specified in the Certificate out of the moneys held for the
account of such Series the total amount payable upon such
purchase, provided that the same conforms to the total amount
payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund,
other than a sale of any Option, Futures Contract, Futures
Contract Option, or any Reverse Repurchase Agreement, the Fund
shall deliver to the Custodian (i) with respect to each sale
of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money
Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the
name of the issuer and the title of the Security; (c) the
number of shares or principal amount sold, and accrued
interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale;
(g) the name of the broker through whom or the person to whom
the sale was made, and the name of the clearing broker, if
any; and (h) the name of the broker to whom the Securities are
to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified
in the Certificate against payment upon receipt of the total
amount payable to the Fund upon such sale, provided that the
same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Fund, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each Option purchased: (a) the
Series to which such Option is specifically allocated; (b) the
type of Option (put or call); (c) the name of the issuer and
the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which
such Option relates and the number of Stock Index Options
purchased; (d) the expiration date; (e) the exercise price;
(f) the dates of purchase and settlement; (g) the total amount
payable by the Fund in connection with such purchase; (h) the
name of the Clearing Member through whom such Option was
purchased; and (i) the name of the broker to whom payment is
to be made. The Custodian shall pay, upon receipt of a Clear-
ing Member's statement confirming the purchase of such Option
held by such Clearing Member for the account of the Custodian
(or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of moneys held for
- 10 -
the account of the Series to which such Option is to be
specifically allocated, the total amount payable upon such
purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount pay-
able as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect
to each such sale: (a) the Series to which such Option was
specifically allocated; (b) the type of Option (put or call);
(c) the name of the issuer and the title and number of shares
subject to such Option or, in the case of a Stock Index Op-
tion, the stock index to which such Option relates and the
number of Stock Index Options sold; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of
the Clearing Member through whom the sale was made. The
Custodian shall consent to the delivery of the Option sold by
the Clearing Member which previously supplied the confirmation
described in preceding paragraph 1 of this Article with
respect to such Option against payment to the Custodian of the
total amount payable to the Fund, provided that the same
conforms to the total amount payable as set forth in such
Certificate.
3. Promptly after the exercise by the Fund of any Call
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate specify-
ing with respect to such Call Option: (a) the Series to which
such Call Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the
Call Option; (c) the expiration date; (d) the date of exercise
and settlement; (e) the exercise price per share; (f) the
total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of
the Securities underlying the Call Option which was exercised,
pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total
amount payable to the Clearing Member through whom the Call
Option was exercised, provided that the same conforms to the
total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate specify-
ing with respect to such Put Option: (a) the Series to which
such Put Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the
Put Option; (c) the expiration date; (d) the date of exercise
and settlement; (e) the exercise price per share; (f) the
total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Op-
tion was exercised. The Custodian shall, upon receipt of the
- 11 -
amount payable upon the exercise of the Put Option, deliver or
direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the
amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock
Index Option purchased by the Fund pursuant to paragraph 1
hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to such Stock Index Option: (a) the
Series to which such Stock Index Option was specifically al-
located; (b) the type of Stock Index Option (put or call); (c)
the number of Options being exercised; (d) the stock index to
which such Option relates; (e) the expiration date; (f) the
exercise price; (g) the total amount to be received by the
Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Covered Call Option: (a) the
Series for which such Covered Call Option was written; (b) the
name of the issuer and the title and number of shares for
which the Covered Call Option was written and which underlie
the same; (c) the expiration date; (d) the exercise price; (e)
the premium to be received by the Fund; (f) the date such
Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received.
The Custodian shall deliver or cause to be delivered, in
exchange for receipt of the premium specified in the
Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs
prevailing among Clearing Members dealing in Covered Call Op-
tions and shall impose, or direct the Depository to impose,
upon the underlying Securities specified in the Certificate
specifically allocated to such Series such restrictions as may
be required by such receipts. Notwithstanding the foregoing,
the Custodian has the right, upon prior written notification
to the Fund, at any time to refuse to issue any receipts for
Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Op-
tion.
7. Whenever a Covered Call Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian a
Certificate instructing the Custodian to deliver, or to direct
the Depository to deliver, the Securities subject to such
Covered Call Option and specifying: (a) the Series for which
such Covered Call Option was written; (b) the name of the is-
suer and the title and number of shares subject to the Covered
Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount pay-
able to the Fund upon such delivery. Upon the return and/or
cancellation of any receipts delivered pursuant to paragraph 6
of this Article, the Custodian shall deliver, or direct the
- 12 -
Depository to deliver, the underlying Securities as specified
in the Certificate against payment of the amount to be
received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing with respect to such Put Option: (a) the Series for which
such Put Option was written; (b) the name of the issuer and
the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Put Option is written; (g) the name of
the Clearing Member through whom the premium is to be received
and to whom a Put Option guarantee letter is to be delivered;
(h) the amount of cash, and/or the amount and kind of Securi-
ties, if any, specifically allocated to such Series to be
deposited in the Senior Security Account for such Series; and
(i) the amount of cash and/or the amount and kind of Securi-
ties specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian
shall, after making the deposits into the Collateral Account
specified in the Certificate, issue a Put Option guarantee
letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member
specified in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the foregoing,
the Custodian shall be under no obligation to issue any Put
Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and
described in the preceding paragraph is exercised, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing: (a) the Series to which such Put Option was written; (b)
the name of the issuer and title and number of shares subject
to the Put Option; (c) the Clearing Member from whom the
underlying Securities are to be received; (d) the total amount
payable by the Fund upon such delivery; (e) the amount of cash
and/or the amount and kind of Securities specifically al-
located to such Series to be withdrawn from the Collateral
Account for such Series and (f) the amount of cash and/or the
amount and kind of Securities, specifically allocated to such
Series, if any, to be withdrawn from the Senior Security Ac-
count. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian
in connection with such Put Option, the Custodian shall pay
out of the moneys held for the account of the Series to which
such Put Option was specifically allocated the total amount
payable to the Clearing Member specified in the Certificate as
set forth in such Certificate against delivery of such Securi-
ties, and shall make the withdrawals specified in such
Certificate.
10. Whenever the Fund writes a Stock Index Option, the
Fund shall promptly deliver to the Custodian a Certificate
- 13 -
specifying with respect to such Stock Index Option: (a) the
Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the
number of options written; (d) the stock index to which such
Option relates; (e) the expiration date; (f) the exercise
price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in
the Senior Security Account for such Series; (j) the amount of
cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the
Collateral Account for such Series; and (k) the amount of cash
and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in a Margin Account,
and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into
the Senior Security Account specified in the Certificate, and
either (1) deliver such receipts, if any, which the Custodian
has specifically agreed to issue, which are in accordance with
the customs prevailing among Clearing Members in Stock Index
Options and make the deposits into the Collateral Account
specified in the Certificate, or (2) make the deposits into
the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Stock Index Op-
tion: (a) the Series for which such Stock Index Option was
written; (b) such information as may be necessary to identify
the Stock Index Option being exercised; (c) the Clearing
Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise,
and whether such amount is to be paid by or to the Fund; (e)
the amount of cash and/or amount and kind of Securities, if
any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any,
to be withdrawn from the Senior Security Account for such
Series; and the amount of cash and/or the amount and kind of
Securities, if any, to be withdrawn from the Collateral Ac-
count for such Series. Upon the return and/or cancellation of
the receipt, if any, delivered pursuant to the preceding
paragraph of this Article, the Custodian shall pay out of the
moneys held for the account of the Series to which such Stock
Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any,
as specified therein.
12. Whenever the Fund purchases any Option identical to
a previously written Option described in paragraphs, 6, 8 or
10 of this Article in a transaction expressly designated as a
"Closing Purchase Transaction" in order to liquidate its posi-
tion as a writer of an Option, the Fund shall promptly deliver
- 14 -
to the Custodian a Certificate specifying with respect to the
Option being purchased: (a) that the transaction is a Closing
Purchase Transaction; (b) the Series for which the Option was
written; (c) the name of the issuer and the title and number
of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and
the number of Options held; (d) the exercise price; (e) the
premium to be paid by the Fund; (f) the expiration date; (g)
the type of Option (put or call); (h) the date of such
purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Collateral Account, a specified Margin Account, or the
Senior Security Account for such Series. Upon the Custodian's
payment of the premium and the return and/or cancellation of
any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the Option being liquidated through
the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed
restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a
Closing Purchase Transaction with respect to any Option
purchased or written by the Fund and described in this
Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3
Article III herein, and upon the return and/or cancellation of
any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin Ac-
count and/or the Senior Security Account as may be specified
in a Certificate received in connection with such expiration,
exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures
Contract, the Fund shall deliver to the Custodian a
Certificate specifying with respect to such Futures Contract,
(or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is
being entered; (b) the category of Futures Contract (the name
of the underlying stock index or financial instrument); (c)
the number of identical Futures Contracts entered into; (d)
the delivery or settlement date of the Futures Contract(s);
(e) the date the Futures Contract(s) was (were) entered into
and the maturity date; (f) whether the Fund is buying (going
long) or selling (going short) on such Futures Contract(s);
(g) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be deposited in the Senior Security Account
for such Series; (h) the name of the broker, dealer, or
futures commission merchant through whom the Futures Contract
was entered into; and (i) the amount of fee or commission, if
- 15 -
any, to be paid and the name of the broker, dealer, or futures
commission merchant to whom such amount is to be paid. The
Custodian shall make the deposits, if any, to the Margin Ac-
count in accordance with the terms and conditions of the
Margin Account Agreement. The Custodian shall make payment
out of the moneys specifically allocated to such Series of the
fee or commission, if any, specified in the Certificate and
deposit in the Senior Security Account for such Series the
amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment
required to be made by the Fund to a broker, dealer, or
futures commission merchant with respect to an outstanding
Futures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agree-
ment.
(b) Any variation margin payment or similar payment
from a broker, dealer, or futures commission merchant to the
Fund with respect to an outstanding Futures Contract, shall be
received and dealt with by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian
hereunder is retained by the Fund until delivery or settlement
is made on such Futures Contract, the Fund shall deliver to
the Custodian a Certificate specifying: (a) the Futures
Contract and the Series to which the same relates; (b) with
respect to a Stock Index Futures Contract, the total cash
settlement amount to be paid or received, and with respect to
a Financial Futures Contract, the Securities and/or amount of
cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or
delivery is to be made or received; and (d) the amount of cash
and/or Securities to be withdrawn from the Senior Security
Account for such Series. The Custodian shall make the payment
or delivery specified in the Certificate, and delete such
Futures Contract from the statements delivered to the Fund
pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures
Contract to offset a Futures Contract held by the Custodian
hereunder, the Fund shall deliver to the Custodian a
Certificate specifying: (a) the items of information required
in a Certificate described in paragraph 1 of this Article, and
(b) the Futures Contract being offset. The Custodian shall
make payment out of the money specifically allocated to such
Series of the fee or commission, if any, specified in the
Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3
of Article III herein, and make such withdrawals from the
Senior Security Account for such Series as may be specified in
such Certificate. The withdrawals, if any, to be made from
- 16 -
the Margin Account shall be made by the Custodian in ac-
cordance with the terms and conditions of the Margin Account
Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
Option by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series to which such Option
is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price;
(f) the dates of purchase and settlement; (g) the amount of
premium to be paid by the Fund upon such purchase; (h) the
name of the broker or futures commission merchant through whom
such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made.
The Custodian shall pay out of the moneys specifically al-
located to such Series, the total amount to be paid upon such
purchase to the broker or futures commissions merchant through
whom the purchase was made, provided that the same conforms to
the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Op-
tion purchased by the Fund pursuant to paragraph 1 hereof, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) Series to which
such Futures Contract Option was specifically allocated; (b)
the type of Future Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount pay-
able to the Fund upon such sale; and (h) the name of the
broker of futures commission merchant through whom the sale
was made. The Custodian shall consent to the cancellation of
the Futures Contract Option being closed against payment to
the Custodian of the total amount payable to the Fund,
provided the same conforms to the total amount payable as set
forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the
Fund pursuant to paragraph 1 is exercised by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract Op-
tion was specifically allocated; (b) the particular Futures
Contract Option (put or call) being exercised; (c) the type of
Futures Contract underlying the Futures Contract Option; (d)
the date of exercise; (e) the name of the broker or futures
- 17 -
commission merchant through whom the Futures Contract Option
is exercised; (f) the net total amount, if any, payable by the
Fund; (g) the amount, if any, to be received by the Fund; and
(h) the amount of cash and/or the amount and kind of Securi-
ties to be deposited in the Senior Security Account for such
Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the pay-
ments, if any, and the deposits, if any, into the Senior
Security Account as specified in the Certificate. The
deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and condi-
tions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option,
the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a)
the Series for which such Futures Contract Option was written;
(b) the type of Futures Contract Option (put or call); (c) the
type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the expiration date; (e) the
exercise price; (f) the premium to be received by the Fund;
(g) the name of the broker or futures commission merchant
through whom the premium is to be received; and (h) the amount
of cash and/or the amount and kind of Securities, if any, to
be deposited in the Senior Security Account for such Series.
The Custodian shall, upon receipt of the premium specified in
the Certificate, make out of the moneys and Securities
specifically allocated to such Series the deposits into the
Senior Security Account, if any, as specified in the
Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the
Fund which is a call is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specifically
allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the name of the broker or futures
commission merchant through whom such Futures Contract Option
was exercised; (e) the net total amount, if any, payable to
the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of
cash and/or the amount and kind of Securities to be deposited
in the Senior Security Account for such Series. The Custodian
shall, upon its receipt of the net total amount payable to the
Fund, if any, specified in such Certificate make the payments,
if any, and the deposits, if any, into the Senior Security
Account as specified in the Certificate. The deposits, if any,
to be made to the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
- 18 -
6. Whenever a Futures Contract Option which is written
by the Fund and which is a put is exercised, the Fund shall
promptly deliver to the Custodian a Certificate specifying:
(a) the Series to which such Option was specifically al-
located; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying such Futures
Contract Option; (d) the name of the broker or futures commis-
sion merchant through whom such Futures Contract Option is
exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount and
kind of Securities and/or cash to be withdrawn from or
deposited in, the Senior Security Account for such Series, if
any. The Custodian shall, upon its receipt of the net total
amount payable to the Fund, if any, specified in the
Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any,
and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract
Option identical to a previously written Futures Contract Op-
tion described in this Article in order to liquidate its posi-
tion as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing with respect to the Futures Contract Option being
purchased: (a) the Series to which such Option is specifically
allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as
may be necessary to identify the Futures Contract underlying
the Futures Option Contract; (d) the exercise price; (e) the
premium to be paid by the Fund; (f) the expiration date; (g)
the name of the broker or futures commission merchant to whom
the premium is to be paid; and (h) the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior
Security Account specified in the Certificate. The withdraw-
als, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any Futures Contract Op-
tion written or purchased by the Fund and described in this
Article, the Custodian shall (a) delete such Futures Contract
Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdraw-
als from and/or in the case of an exercise such deposits into
the Senior Security Account as may be specified in a
Certificate. The deposits to and/or withdrawals from the
- 19 -
Margin Account, if any, shall be made by the Custodian in ac-
cordance with the terms and conditions of the Margin Account
Agreement.
9. Futures Contracts acquired by the Fund through the
exercise of a Futures Contract Option described in this
Article shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the
Fund, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series for which such short
sale was made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold,
and accrued interest or dividends, if any; (d) the dates of
the sale and settlement; (e) the sale price per unit; (f) the
total amount credited to the Fund upon such sale, if any, (g)
the amount of cash and/or the amount and kind of Securities,
if any, which are to be deposited in a Margin Account and the
name in which such Margin Account has been or is to be
established; (h) the amount of cash and/or the amount and kind
of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such
short sale was made. The Custodian shall upon its receipt of
a statement from such broker confirming such sale and that the
total amount credited to the Fund upon such sale, if any, as
specified in the Certificate is held by such broker for the
account of the Custodian (or any nominee of the Custodian) as
custodian of the Fund, issue a receipt or make the deposits
into the Margin Account and the Senior Security Account
specified in the Certificate.
2. In connection with the closing-out of any short
sale, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to each such closing out:
(a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the
number of shares or the principal amount, and accrued interest
or dividends, if any, required to effect such closing-out to
be delivered to the broker; (d) the dates of closing-out and
settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net
total amount payable to the broker upon such closing-out; (h)
the amount of cash and the amount and kind of Securities to be
withdrawn, if any, from the Margin Account; (i) the amount of
cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name
of the broker through whom the Fund is effecting such
closing-out. The Custodian shall, upon receipt of the net
total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued
- 20 -
by the Custodian with respect to the short sale being
closed-out, pay out of the moneys held for the account of the
Fund to the broker the net total amount payable to the broker,
and make the withdrawals from the Margin Account and the
Senior Security Account, as the same are specified in the
Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase
Agreement with respect to Securities and money held by the
Custodian hereunder, the Fund shall deliver to the Custodian a
Certificate, or in the event such Reverse Repurchase Agreement
is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund
in connection with such Reverse Repurchase Agreement and
specifically allocated to such Series; (c) the broker or
dealer through or with whom the Reverse Repurchase Agreement
is entered; (d) the amount and kind of Securities to be
delivered by the Fund to such broker or dealer; (e) the date
of such Reverse Repurchase Agreement; and (f) the amount of
cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a
Senior Security Account for such Series in connection with
such Reverse Repurchase Agreement. The Custodian shall, upon
receipt of the total amount payable to the Fund specified in
the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior
Security Account, specified in such Certificate or Oral
Instructions.
2. Upon the termination of a Reverse Repurchase Agree-
ment described in preceding paragraph 1 of this Article, the
Fund shall promptly deliver a Certificate or, in the event
such Reverse Repurchase Agreement is a Money Market Security,
a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being
terminated and the Series for which same was entered; (b) the
total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series
in connection with such termination; (d) the date of termina-
tion; (e) the name of the broker or dealer with or through
whom the Reverse Repurchase Agreement is to be terminated; and
(f) the amount of cash and/or the amount and kind of Securi-
ties to be withdrawn from the Senior Securities Account for
such Series. The Custodian shall, upon receipt of the amount
and kind of Securities to be received by the Fund specified in
the Certificate or Oral Instructions, make the payment to the
broker or dealer, and the withdrawals, if any, from the Senior
- 21 -
Security Account, specified in such Certificate or Oral
Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities
specifically allocated to a Series held by the Custodian
hereunder, the Fund shall deliver or cause to be delivered to
the Custodian a Certificate specifying with respect to each
such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities, (c) the number of shares or the
principal amount loaned, (d) the date of loan and delivery,
(e) the total amount to be delivered to the Custodian against
the loan of the Securities, including the amount of cash col-
lateral and the premium, if any, separately identified, and
(f) the name of the broker, dealer, or financial institution
to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial
institution to which the loan was made upon receipt of the
total amount designated as to be delivered against the loan of
Securities. The Custodian may accept payment in connection
with a delivery otherwise than through the Book-Entry System
or Depository only in the form of a certified or bank
cashier's check payable to the order of the Fund or the
Custodian drawn on New York Clearing House funds and may
deliver Securities in accordance with the customs prevailing
among dealers in securities.
2. Promptly after each termination of the loan of
Securities by the Fund, the Fund shall deliver or cause to be
delivered to the Custodian a Certificate specifying with
respect to each such loan termination and return of Securi-
ties: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the
Custodian (including the cash collateral for such Securities
minus any offsetting credits as described in said
Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be
returned. The Custodian shall receive all Securities returned
from the broker, dealer, or financial institution to which
such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the
total amount payable upon such return of Securities as set
forth in the Certificate.
- 22 -
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such
deposits to, or withdrawals from, a Senior Security Account as
specified in a Certificate received by the Custodian. Such
Certificate shall specify the Series for which such deposit or
withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such
Series to be deposited in, or withdrawn from, such Senior
Security Account for such Series. In the event that the Fund
fails to specify in a Certificate the Series, the name of the
issuer, the title and the number of shares or the principal
amount of any particular Securities to be deposited by the
Custodian into, or withdrawn from, a Senior Securities Ac-
count, the Custodian shall be under no obligation to make any
such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from
a Margin Account to the broker, dealer, futures commission
merchant or Clearing Member in whose name, or for whose
benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any
Margin Account shall be dealt with in accordance with the
terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and
security interest in and to any property at any time held by
the Custodian in any Collateral Account described herein. In
accordance with applicable law the Custodian may enforce its
lien and realize on any such property whenever the Custodian
has made payment or delivery pursuant to any Put Option
guarantee letter or similar document or any receipt issued
hereunder by the Custodian. In the event the Custodian should
realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee
letter or similar document or any receipt, such deficiency
shall be a debt owed the Custodian by the Fund within the
scope of Article XIV herein.
5. On each business day the Custodian shall furnish the
Fund with a statement with respect to each Margin Account in
which money or Securities are held specifying as of the close
of business on the previous business day: (a) the name of the
Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The
Custodian shall make available upon request to any broker,
dealer, or futures commission merchant specified in the name
of a Margin Account a copy of the statement furnished the Fund
with respect to such Margin Account.
- 23 -
6. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in a
Collateral Account for any Series, the Custodian shall furnish
the Fund with a statement with respect to such Collateral Ac-
count specifying the amount of cash and/or the amount and kind
of Securities held therein. No later than the close of busi-
ness next succeeding the delivery to the Fund of such state-
ment, the Fund shall furnish to the Custodian a Certificate
specifying the then market value of the Securities described
in such statement. In the event such then market value is
indicated to be less than the Custodian's obligation with
respect to any outstanding Put Option guarantee letter or
similar document, the Fund shall promptly specify in a
Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such
deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of
the resolution of the Board of Trustees of the Fund, certified
by the Secretary, the Clerk, any Assistant Secretary or any
Assistant Clerk, either (i) setting forth with respect to the
Series specified therein the date of the declaration of a
dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall
be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total
amount payable to the Dividend Agent and any sub-dividend
agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein
the declaration of dividends and distributions on a daily
basis and authorizing the Custodian to rely on Oral Instruc-
tions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable
per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent
on the payment date.
2. Upon the payment date specified in such resolution,
Oral Instructions or Certificate, as the case may be, the
Custodian shall pay out of the moneys held for the account of
each Series the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
- 24 -
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall
deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the
Custodian for the sale of such Shares and specifically al-
located to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent,
the Custodian shall credit such money to the separate account
in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described
in the foregoing provisions of this Article, the Custodian
shall pay, out of the money held for the account of such
Series, all original issue or other taxes required to be paid
by the Fund in connection with such issuance upon the receipt
of a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund
desires the Custodian to make payment out of the money held by
the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian a Certificate
specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by the
Transfer Agent for redemption and that such Shares are in good
form for redemption, the Custodian shall make payment to the
Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the
Certificate issued pursuant to the foregoing paragraph 4 of
this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
pursuant to any check redemption privilege which may from time
to time be offered by the Fund, the Custodian, unless
otherwise instructed by a Certificate, shall, upon receipt of
an advice from the Fund or its agent setting forth that the
redemption is in good form for redemption in accordance with
the check redemption procedure, honor the check presented as
part of such check redemption privilege out of the moneys held
in the separate account of the Series of the Shares being
redeemed.
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ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion
advance funds on behalf of any Series which results in an
overdraft because the moneys held by the Custodian in the
separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities
specifically allocated to such Series, as set forth in a
Certificate or Oral Instructions, or which results in an
overdraft in the separate account of such Series for some
other reason, or if the Fund is for any other reason indebted
to the Custodian with respect to a Series, including any
indebtedness to The Bank of New York under the Fund's Cash
Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using
Securities as collateral pursuant to a separate agreement and
subject to the provisions of paragraph 2 of this Article),
such overdraft or indebtedness shall be deemed to be a loan
made by the Custodian to the Fund for such Series payable on
demand and shall bear interest from the date incurred at a
rate per annum (based on a 360-day year for the actual number
of days involved) equal to 1/2% over Custodian's prime
commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such
prime commercial lending rate but in no event to be less than
6% per annum. In addition, the Fund hereby agrees that the
Custodian shall have a continuing lien and security interest
in and to any property specifically allocated to such Series
at any time held by it for the benefit of such Series or in
which the Fund may have an interest which is then in the
Custodian's possession or control or in possession or control
of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time
to charge any such overdraft or indebtedness together with
interest due thereon against any balance of account standing
to such Series' credit on the Custodian's books. In addition,
the Fund hereby covenants that on each Business Day on which
either it intends to enter a Reverse Repurchase Agreement and/
or otherwise borrow from a third party, or which next succeeds
a Business Day on which at the close of business the Fund had
outstanding a Reverse Repurchase Agreement or such a borrow-
ing, it shall prior to 9 a.m., New York City time, advise the
Custodian, in writing, of each such borrowing, shall specify
the Series to which the same relates, and shall not incur any
indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian
by any bank (including, if the borrowing is pursuant to a
separate agreement, the Custodian) from which it borrows money
for investment or for temporary or emergency purposes using
Securities held by the Custodian hereunder as collateral for
such borrowings, a notice or undertaking in the form currently
- 26 -
employed by any such bank setting forth the amount which such
bank will loan to the Fund against delivery of a stated amount
of collateral. The Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such
borrowing: (a) the Series to which such borrowing relates; (b)
the name of the bank, (c) the amount and terms of the borrow-
ing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other
loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan
becomes due and payable, (f) the total amount payable to the
Fund on the borrowing date, (g) the market value of Securities
to be delivered as collateral for such loan, including the
name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment
purposes or for temporary or emergency purposes and that such
loan is in conformance with the Investment Company Act of 1940
and the Fund's prospectus. The Custodian shall deliver on the
borrowing date specified in a Certificate the specified col-
lateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such
Securities as additional collateral as may be specified in a
Certificate to collateralize further any transaction described
in this paragraph. The Fund shall cause all Securities
released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the
event that the Fund fails to specify in a Certificate the
Series, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall
not be under any obligation to deliver any Securities.
ARTICLE XV
TERMINAL LINK
1. At no time and under no circumstances shall the Fund
be obligated to have or utilize the Terminal Link, and the
provisions of this Article shall apply if, but only if, the
Fund in its sole and absolute discretion elects to utilize the
Terminal Link to transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Fund only
for the purpose of the Fund providing Certificates to the
Custodian with respect to transactions involving Securities or
for the transfer of money to be applied to the payment of
- 27 -
dividends, distributions or redemptions of Fund Shares, and
shall be utilized by the Custodian only for the purpose of
providing notices to the Fund. Such use shall commence only
after the Fund shall have delivered to the Custodian a
Certificate substantially in the form of Exhibit D and shall
have established access codes. Each use of the Terminal Link
by the Fund shall constitute a representation and warranty
that the Terminal Link is being used only for the purposes
permitted hereby, that at least two Officers have each
utilized an access code, that such safekeeping procedures have
been established by the Fund, and that such use does not
contravene the Investment Company Act of 1940, as amended, or
the rules or regulations thereunder.
3. The Fund shall obtain and maintain at its own cost
and expense all equipment and services, including, but not
limited to communications services, necessary for it to uti-
lize the Terminal Link, and the Custodian shall not be re-
sponsible for the reliability or availability of any such
equipment or services.
4. The Fund acknowledges that any data bases made
available as part of, or through the Terminal Link and any
proprietary data, software, processes, information and docu-
mentation (other than any such which are or become part of the
public domain or are legally required to be made available to
the public) (collectively, the "Information"), are the
exclusive and confidential property of the Custodian. The
Fund shall, and shall cause others to which it discloses the
Information, to keep the Information confidential by using the
same care and discretion it uses with respect to its own
confidential property and trade secrets, and shall neither
make nor permit any disclosure without the express prior
written consent of the Custodian.
5. Upon termination of this Agreement for any reason,
the Fund shall return to the Custodian any and all copies of
the Information which are in the Fund's possession or under
its control, or which the Fund distributed to third parties.
The provisions of this Article shall not affect the copyright
status of any of the Information which may be copyrighted and
shall apply to all Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Ter-
minal Link from time to time without notice to the Fund except
that the Custodian shall give the Fund notice not less than 75
days in advance of any modification which would materially
adversely affect the Fund's operation, and the Fund agrees
that the Fund shall not modify or attempt to modify the
Terminal Link without the Custodian's prior written consent.
The Fund acknowledges that any software or procedures provided
the Fund as part of the Terminal Link are the property of the
Custodian and, accordingly, the Fund agrees that any
modifications to the Terminal Link, whether by the Fund, or by
- 28 -
the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and
suppliers it utilizes or the Fund utilizes in connection with
the Terminal Link makes any warranties or representations,
express or implied, in fact or in law, including but not
limited to warranties of merchantability and fitness for a
particular purpose.
8. The Fund will cause its Officers and employees to
treat the authorization codes and the access codes applicable
to Terminal Link with extreme care, and irrevocably authorizes
the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. The
Fund acknowledges that it is its responsibility to assure that
only its Officers use the Terminal Link on its behalf, and
that a Custodian shall not be responsible nor liable for use
of the Terminal Link on the Fund's behalf by persons other
than such persons or Officers, or by only a single Officer,
nor for any alteration, omission, or failure to promptly
forward.
9(a). Except as otherwise specifically provided in
Section 9(b) of this Article, the Custodian shall have no
liability for any losses, damages, injuries, claims, costs or
expenses arising out of or in connection with any failure,
malfunction or other problem relating to the Terminal Link
except for money damages suffered as the direct result of the
negligence of the Custodian in an amount not exceeding for any
incident $25,000 provided, however, that the Custodian shall
have no liability under this Section 9 if the Fund fails to
comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in
executing or failing to execute in accordance with a
Certificate received through Terminal Link shall be only with
respect to a transfer of funds which is not made in accordance
with such Certificate after such Certificate shall have been
duly acknowledged by the Custodian, and shall be contingent
upon the Fund complying with the provisions of Section 12 of
this Article, and shall be limited to (i) restoration of the
principal amount mistransferred, if and to the extent that the
Custodian would be required to make such restoration under
applicable law, and (ii) the lesser of (A) a Fund's actual
pecuniary loss incurred by reason of its loss of use of the
mistransferred funds or the funds which were not transferred,
as the case may be, or (B) compensation for the loss of the
use of the mistransferred funds or the funds which were not
transferred, as the case may be, at a rate per annum equal to
the average federal funds rate as computed from the Federal
Reserve Bank of New York's daily determination of the
effective rate for federal funds, for the period during which
a Fund has lost use of such funds. In no event shall the
Custodian have any liability for failing to execute in
- 29 -
accordance with a Certificate a transfer of funds where the
Certificate is received by the Custodian through Terminal Link
other than through the applicable transfer module for the
particular instructions contained in such Certificate.
10. Without limiting the generality of the foregoing, in
no event shall the Custodian or any manufacturer or supplier
of its computer equipment, software or services relating to
the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which the Fund may incur
or experience by reason of its use of the Terminal Link even
if the Custodian or any manufacturer or supplier has been
advised of the possibility of such damages, nor with respect
to the use of the Terminal Link shall the Custodian or any
such manufacturer or supplier be liable for acts of God, or
with respect to the following to the extent beyond such
person's reasonable control: machine or computer breakdown or
malfunction, interruption or malfunction of communication
facilities, labor difficulties or any other similar or
dissimilar cause.
11. The Fund shall notify the Custodian of any errors,
omissions or interruptions in, or delay or unavailability of,
the Terminal Link as promptly as practicable, and in any event
within 24 hours after the earliest of (i) discovery thereof,
(ii) the Business Day on which discovery should have occurred
through the exercise of reasonable care and (iii) in the case
of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that
discovery and receipt of notice may only occur on a business
day. The Custodian shall promptly advise the Fund whenever
the Custodian learns of any errors, omissions or interruption
in, or delay or unavailability of, the Terminal Link.
12. The Custodian shall verify to the Fund, by use of
the Terminal Link, receipt of each Certificate the Custodian
receives through the Terminal Link, and in the absence of such
verification the Custodian shall not be liable for any failure
to act in accordance with such Certificate and the Fund may
not claim that such Certificate was received by the Custodian.
Such verification, which may occur after the Custodian has
acted upon such Certificate, shall be accomplished on the same
day on which such Certificate is received.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to
employ, as sub-custodian for each Series' Foreign Securities
(as such term is defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, as amended) and
other assets, the foreign banking institutions and foreign
- 30 -
securities depositories and clearing agencies designated on
Schedule I hereto ("Foreign Sub-Custodians") to carry out
their respective responsibilities in accordance with the terms
of the sub-custodian agreement between each such Foreign Sub-
Custodian and the Custodian, copies of which have been
previously delivered to the Fund and receipt of which is
hereby acknowledged (each such agreement, a "Foreign Sub-
Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution substantially in the form
attached as Exhibit E of the Fund's Board of Trustees, the
Fund may designate any additional foreign sub-custodian with
which the Custodian has an agreement for such entity to act as
the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to
Schedule I. Upon receipt of a Certificate from the Fund, the
Custodian shall cease the employment of any one or more
Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted
from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be
substantially in the form previously delivered to the Fund and
will not be amended in a way that materially adversely affects
the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as
belonging to each Series of the Fund the Foreign Securities of
such Series held by each Foreign Sub-Custodian. At the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claims by the
Fund or any Series against a Foreign Sub-Custodian as a
consequence of any loss, damage, cost, expense, liability or
claim sustained or incurred by the Fund or any Series if and
to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or
claim.
4. Upon request of the Fund, the Custodian will,
consistent with the terms of the applicable Foreign Sub-
Custodian Agreement, use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as
such books and records relate to the performance of such
Foreign Sub-Custodian under its agreement with the Custodian
on behalf of the Fund.
5. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the
securities and other assets of each Series held by Foreign
Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series'
Foreign Securities and other assets, and advices or
notifications of any transfers of Foreign Securities to or
from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
- 31 -
6. The Custodian shall furnish annually to the Fund, as
mutually agreed upon, information concerning the Foreign Sub-
Custodians employed by the Custodian. Such information shall
be similar in kind and scope to that furnished to the Fund in
connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information
pertaining to (i) the Foreign Custodians' financial strength,
general reputation and standing in the countries in which they
are located and their ability to provide the custodial
services required, and (ii) whether the Foreign Sub-Custodians
would provide a level of safeguards for safekeeping and
custody of securities not materially different form those
prevailing in the United States. The Custodian shall monitor
the general operating performance of each Foreign Sub-
Custodian. The Custodian agrees that it will use reasonable
care in monitoring compliance by each Foreign Sub-Custodian
with the terms of the relevant Foreign Sub-Custodian Agreement
and that if it learns of any breach of such Foreign Sub-
Custodian Agreement believed by the Custodian to have a
material adverse effect on the Fund or any Series it will
promptly notify the Fund of such breach. The Custodian also
agrees to use reasonable and diligent efforts to enforce its
rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund
all notices, reports or other written information received
pertaining to the Fund's Foreign Securities, including without
limitation, notices of corporate action, proxies and proxy
solicitation materials.
8. Notwithstanding any provision of this Agreement to
the contrary, settlement and payment for securities received
for the account of any Series and delivery of securities
maintained for the account of such Series may be effected in
accordance with the customary or established securities
trading or securities processing practices and procedures in
the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities
from such purchaser or dealer.
9. Notwithstanding any other provision in this
Agreement to the contrary, with respect to any losses or
damages arising out of or relating to any actions or omissions
of any Foreign Sub-Custodian the sole responsibility and
liability of the Custodian shall be to take appropriate action
at the Fund's expense to recover such loss or damage from the
Foreign Sub-Custodian. It is expressly understood and agreed
that the Custodian's sole responsibility and liability shall
be limited to amounts so recovered from the Foreign Sub-
Custodian.
- 32 -
ARTICLE XVII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in
Article XVI neither the Custodian nor its nominee shall be
liable for any loss or damage, including counsel fees,
resulting from its action or omission to act or otherwise,
either hereunder or under any Margin Account Agreement, except
for any such loss or damage arising out of its own negligence
or willful misconduct. In no event shall the Custodian be
liable to the Fund or any third party for special, indirect or
consequential damages or lost profits or loss of business,
arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with
respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and
opinion of counsel to the Fund or of its own counsel, at the
expense of the Fund, and shall be fully protected with respect
to anything done or omitted by it in good faith in conformity
with such advice or opinion. The Custodian shall be liable to
the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian
or any of its employees or agents.
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality
of the purchase, sale or writing thereof, or the propriety of
the amount paid or received therefor;
(b) The legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or paid
therefor;
(c) The legality of the declaration or payment of
any dividend by the Fund;
(d) The legality of any borrowing by the Fund using
Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obligation
to see to it that any cash collateral delivered to it by a
broker, dealer, or financial institution or held by it at any
time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it
might sustain as a result of such loan. The Custodian
specifically, but not by way of limitation, shall not be under
any duty or obligation periodically to check or notify the
- 33 -
Fund that the amount of such cash collateral held by it for
the Fund is sufficient collateral for the Fund, but such duty
or obligation shall be the sole responsibility of the Fund.
In addition, the Custodian shall be under no duty or obliga-
tion to see that any broker, dealer or financial institution
to which portfolio Securities of the Fund are lent pursuant to
Article X of this Agreement makes payment to it of any
dividends or interest which are payable to or for the account
of the Fund during the period of such loan or at the termina-
tion of such loan, provided, however, that the Custodian shall
promptly notify the Fund in the event that such dividends or
interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account or Collateral Account in connection with
transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment
to the Fund of any variation margin payment or similar payment
which the Fund may be entitled to receive from such broker,
dealer, futures commission merchant or Clearing Member, to see
that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the
amount the Fund is entitled to receive, or to notify the Fund
of the Custodian's receipt or non-receipt of any such pay-
ment.
3. The Custodian shall not be liable for, or considered
to be the Custodian of, any money, whether or not represented
by any check, draft, or other instrument for the payment of
money, received by it on behalf of the Fund until the
Custodian actually receives and collects such money directly
or by the final crediting of the account representing the
Fund's interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall
not be liable for ascertaining or acting upon any calls,
conversions, exchange offers, tenders, interest rate changes
or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received
timely notice from the Depository. In no event shall the
Custodian have any responsibility or liability for the failure
of the Depository to collect, or for the late collection or
late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable.
However, upon receipt of a Certificate from the Fund of an
overdue amount on Securities held in the Depository the
Custodian shall make a claim against the Depository on behalf
of the Fund, except that the Custodian shall not be under any
obligation to appear in, prosecute or defend any action suit
or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or
liability, unless indemnity satisfactory to it against all
- 34 -
expense and liability be furnished as often as may be
required.
5. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount due to
the Fund from the Transfer Agent of the Fund nor to take any
action to effect payment or distribution by the Transfer Agent
of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount if the
Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation,
unless and until (i) it shall be directed to take such action
by a Certificate and (ii) it shall be assured to its satisfac-
tion of reimbursement of its costs and expenses in connection
with any such action.
7. The Custodian may in addition to the employment of
Foreign Sub-Custodians pursuant to Article XVI appoint one or
more banking institutions as Depository or Depositories, as
Sub-Custodian or Sub-Custodians, or as Co-Custodian or
Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and
moneys at any time owned by the Fund, upon such terms and
conditions as may be approved in a Certificate or contained in
an agreement executed by the Custodian, the Fund and the
appointed institution.
8. The Custodian shall not be under any duty or obliga-
tion (a) to ascertain whether any Securities at any time
delivered to, or held by it or by any Foreign Sub-Custodian,
for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or
(b) to ascertain whether any transactions by the Fund, whether
or not involving the Custodian, are such transactions as may
properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the
Fund agrees to pay to the Custodian all out-of-pocket expenses
and such compensation as may be agreed upon from time to time
between the Custodian and the Fund. The Custodian may charge
such compensation and any expenses with respect to a Series
incurred by the Custodian in the performance of its duties
pursuant to such agreement against any money specifically al-
located to such Series. Unless and until the Fund instructs
the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner,
the Custodian shall also be entitled to charge against any
money held by it for the account of a Series such Series' pro
rata share (based on such Series net asset value at the time
of the charge to the aggregate net asset value of all Series
at that time) of the amount of any loss, damage, liability or
- 35 -
expense, including counsel fees, for which it shall be
entitled to reimbursement under the provisions of this Agree-
ment. The expenses for which the Custodian shall be entitled
to reimbursement hereunder shall include, but are not limited
to, the expenses of sub-custodians and foreign branches of the
Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of
the Fund.
10. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by
the Custodian and reasonably believed by the Custodian to be a
Certificate. The Custodian shall be entitled to rely upon any
Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the
Custodian a Certificate or facsimile thereof confirming such
Oral Instructions in such manner so that such Certificate or
facsimile thereof is received by the Custodian, whether by
hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such
Oral Instructions are given to the Custodian. The Fund agrees
that the fact that such confirming instructions are not
received, or that contrary instructions are received, by the
Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby
authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral
Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to
have been received from an Officer.
11. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in ac-
cordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and
shall not be liable for, the accuracy of any statements or
representations contained in any such instrument or other
notice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission
merchant or Clearing Member.
12. The books and records pertaining to the Fund which
are in the possession of the Custodian shall be the property
of the Fund. Such books and records shall be prepared and
maintained as required by the Investment Company Act of 1940,
as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representa-
tives, shall have access to such books and records during the
Custodian's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's
authorized representative, and the Fund shall reimburse the
- 36 -
Custodian its expenses of providing such copies. Upon reason-
able request of the Fund, the Custodian shall provide in hard
copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by
the Custodian on a computer disc, or are similarly maintained,
and the Fund shall reimburse the Custodian for its expenses of
providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report
obtained by the Custodian on the system of internal accounting
control of the Book-Entry System, the Depository or O.C.C.,
and with such reports on its own systems of internal account-
ing control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
losses and demands whatsoever, including attorney's fees,
howsoever arising or incurred because of or in connection with
this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII
as part of any check redemption privilege program of the Fund,
except for any such liability, claim, loss and demand arising
out of the Custodian's own negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agree-
ment, including, without limitation, those contained in
Article XVI the Custodian may deliver and receive Securities,
and receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in
accordance with the customs prevailing from time to time among
brokers or dealers in such Securities. When the Custodian is
instructed to deliver Securities against payment, delivery of
such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility
and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instruc-
tions of the Fund, which responsibility and liability shall
continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or
responsibilities whatsoever except such duties and
responsibilities as are specifically set forth in this Agree-
ment, and no covenant or obligation shall be implied in this
Agreement against the Custodian.
ARTICLE XVIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
- 37 -
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board of
Trustees of the Fund, certified by the Secretary, the Clerk,
any Assistant Secretary or any Assistant Clerk, electing to
terminate this Agreement and designating a successor custodian
or custodians, each of which shall be a bank or trust company
having not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the
Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board
of Trustees of the Fund, certified by the Secretary, the
Clerk, any Assistant Secretary or any Assistant Clerk,
designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may
designate a successor custodian which shall be a bank or trust
company having not less than $2,000,000 aggregate capital,
surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian
shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor
custodian all Securities and moneys then owned by the Fund and
held by it as Custodian, after deducting all fees, expenses
and other amounts for the payment or reimbursement of which it
shall then be entitled.
2. If a successor custodian is not designated by the
Fund or the Custodian in accordance with the preceding
paragraph, the Fund shall upon the date specified in the
notice of termination of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held
in the Book-Entry System which cannot be delivered to the
Fund) and moneys then owned by the Fund be deemed to be its
own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the
Book Entry System which cannot be delivered to the Fund to
hold such Securities hereunder in accordance with this Agree-
ment.
ARTICLE XIX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed
by two of the present Officers of the Fund under its seal,
setting forth the names and the signatures of the present
Officers. The Fund agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Officer ceases to be an Officer or in the event that other or
additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement
- 38 -
upon Oral Instructions or signatures of the present Officers
as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the
Custodian, shall be sufficiently given if addressed to the
Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other
place as the Custodian may from time to time designate in
writing.
3. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the
Fund shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund
may from time to time designate in writing.
4. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties
with the same formality as this Agreement and approved by a
resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and
assigns; provided, however, that this Agreement shall not be
assignable by the Fund without the written consent of the
Custodian, or by the Custodian without the written consent of
the Fund, authorized or approved by a resolution of the Fund's
Board of Trustees.
6. This Agreement shall be construed in accordance with
the laws of the State of New York without giving effect to
conflict of laws principles thereof. Each party hereby
consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any
dispute arising hereunder and hereby waives its right to trial
by jury.
7. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but such counterparts shall, together, constitute only one
instrument.
8. A copy of the Declaration of Trust of the Fund is on
file with the Secretary of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on
behalf of the Board of Trustees of the Fund as Trustees and
not individually and that the obligations of this instrument
are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property
of the Fund; provided, however, that the Declaration of Trust
of the Fund provides that the assets of a particular Series of
the Fund shall under no circumstances be charged with li-
abilities attributable to any other Series of the Fund and
- 39 -
that all persons extending credit to, or contracting with or
having any claim against a particular Series of the Fund shall
look only to the assets of that particular Series for payment
of such credit, contract or claim.
- 40 -
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers,
thereunto duly authorized and their respective seals to be
hereunto affixed, as of the day and year first above written.
Investment Funds Inc..
[SEAL] By:_______________________
Attest:
_______________________
PNC Bank, NA
[SEAL] By:_______________________
Name:
Title:
Attest:
_______________________
