P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
Class Z
Shares Only
APRIL 30,
1998
PROSPECTUS BEGINS ON
PAGE ONE
LOGO Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PROSPECTUS April 30,
1998
Smith Barney
Special Equities Fund -- Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The 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
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 the Smith Barney Investment Funds Inc.
(the "Com-
pany"). 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.
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, 1998 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
MUTUAL MANAGEMENT CORP.
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
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
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FINANCIAL HIGHLIGHTS 4
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
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VALUATION OF SHARES 9
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DIVIDENDS, DISTRIBUTIONS AND TAXES 10
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PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 11
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PERFORMANCE 12
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MANAGEMENT OF THE COMPANY AND THE FUND 13
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ADDITIONAL INFORMATION 14
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</TABLE>
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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 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.
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2
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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 Class Z shares
of the
Fund, based on the Fund's operating expenses for its most recent fiscal
year.
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<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75%
Other expenses 0.06
- --------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.81%
</TABLE>
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The nature of the services for which the Fund pays management fees is
described under "Management of the Company and the Fund." "Other
expenses" in
the above table include fees for shareholder services, custodial fees,
legal
and accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear directly or
indirectly.
The example assumes payment by the Fund of operating expenses at the
levels set
forth in the table above. See "Purchase and Redemption of Shares" and
"Manage-
ment of the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY SPECIAL EQUITIES FUND 1 YEAR 3 YEARS 5 YEARS
10 YEARS
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- --------
<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 $45
$100
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- --------
</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
REPRESENTA-
TIVE 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 three-year period ended December
31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report
thereon appears in the Fund's Annual Report dated December 31, 1997.
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 Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY SPECIAL EQUITIES FUND 1997 1996(1) 1995(2)
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<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $28.26 $30.46 $26.49
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.08) (0.08) (0.06)
Net realized and unrealized gain (loss) (1.42) (1.48) 4.79
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Total Income (Loss) From Operations (1.50) (1.56) 4.73
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LESS DISTRIBUTIONS FROM:
Net realized gains -- (0.28) (0.76)
Capital -- (0.36) --
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Total Distributions -- (0.64) (0.76)
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NET ASSET VALUE, END OF YEAR $26.76 $28.26 $30.46
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TOTAL RETURN (5.31)% (5.37)% 17.95%++
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NET ASSETS, END OF YEAR (MILLIONS) $14 $13 $5
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.81% 0.80% 1.10%+
Net investment loss (0.29) (0.24) (0.86)+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 145% 118% 113%
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AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06 $ 0.06
- ---------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the net investment income undistributed method,
because it more accurately reflects the per share data for the
period.
(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 Mutual Management Corp. ("MMC") (formerly known as
Smith
Barney Mutual Funds Management Inc.), 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 growth companies, generally not within the
Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by
MMC. These
companies may not have reached a fully mature stage of earnings growth,
since
they may still be in the developmental stage, or may be older companies
which
appear to be entering a new stage of more rapid earnings progress due
to fac-
tors such as management change or development of new technology,
products or
markets. A significant number of these companies may be in technology
areas,
including health care related sectors, and may have annual sales of
less than
$300 million. The Fund may also choose to invest in some relatively
unseasoned
stocks, i.e., securities issued by companies whose market
capitalization is
under $100 million.
The Fund also may invest in small capitalization companies
representative of
the broad benchmarks against which the Fund's performance is frequently
judged
by utilizing an active quantitative investment strategy for a portion
of the
Fund. This portion will provide added diversification and, in addition,
MMC
will select securities using a proprietary technique that are believed
to have
a high probability of outperforming their respective industry or
sector. In
identifying these securities, the Fund's, the Portfolio Manager is
supported by
a quantitatively oriented investment team.
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. Except
for the
Fund's investment objective and those restrictions specifically
identified as
fundamental, which may not be changed without a majority vote of
shareholders
of the Fund, all invest -
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ment policies and practices described in this Prospectus and in the
Statement
of Additional Information are non-fundamental, and may be changed by
the Board
of Directors without shareholder approval.
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 under-
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
lying 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.
MMC, acting under the supervision of the Board of Directors, reviews on
an
ongoing basis to evaluate potential risks, the value of the collateral
and the
creditworthiness of those banks and dealers with which the Fund enters
into
repurchase agreements.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend securities it holds to brokers, dealers
and
other financial organizations provided: (a) the loan is secured
continuously
by collateral consisting of U.S. government securities, cash or cash
equiva-
lents 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.
Futures Contracts and Options on Futures. The Fund may enter into
transac-
tions in futures contracts and options on futures only (i) for bona
fide hedg-
ing purposes (as defined in Commodities Futures Trading Commission
regula-
tions), or (ii) for non-hedging purposes, provided that the aggregate
initial
margin and premiums on such non-hedging positions do not exceed 5% of
the liq-
uidation value of the Fund's assets.
Futures contracts provide for the future sale by one party and
purchase by
another party of a specified amount of a specific security at a
specified
future time and at a specified price. The primary purpose of entering
into a
futures contract by the Fund is to protect the Fund from fluctuations
in the
value of securities without actually buying or selling the securities.
The
Fund may enter into futures contracts and options on futures to seek
higher
investment returns when a futures contract is priced more attractively
than
stocks comprising a benchmark index, to facilitate trading or to reduce
trans-
action costs. The Fund will only enter into futures contracts and
options on
futures contracts that are traded on a domestic exchange and board of
trade.
Assets committed to futures contracts will be segregated at the Fund's
custo-
dian to the extent required by law.
Among the several risks accompanying the utilization of futures
contracts
and options on futures contracts are the following risks: First, the
success-
ful use of futures and options is dependent upon the ability of MMC to
predict
correctly movements in the stock market or in the direction of interest
rates.
These predictions involve skills and techniques that may be different
from
those involved in the management of investments in securities. If the
prices
of the underlying commodities move in an unanticipated manner, the Fund
may
lose the expected benefit of these futures or options transactions and
may
incur losses. Second, positions in futures contracts and options on
futures
contracts may only be closed out by entering into offsetting
transactions on
the exchange where the position was entered into (or
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
through a linked exchange), and, as a result of daily price
fluctuations lim-
its, there can be no assurance the offsetting transaction could be
entered into
at an advantageous price at a particular time. Consequently, the Fund
may real-
ize a loss on a futures contract or option that is not offset by an
increase in
the value of its portfolio securities that are being hedged or the Fund
may not
be able to close a futures or options position without incurring a loss
in the
event of adverse price movements.
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.
Year 2000. The investment management services provided to the Fund by
MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer soft-
ware systems in use today cannot recognize the year 2000, but revert to
1900 or
some other date, due to the manner in which dates were encoded and
calculated.
That failure could have a negative impact on the Fund's operations,
including
the handling of securities trades, pricing and account services. MMC
and Smith
Barney have advised the Fund that they have been reviewing all of their
com-
puter systems and actively working on necessary changes to their
systems to
prepare for the year 2000 and expect that their systems will be
compliant
before that date. In addition, MMC has been advised by the Fund's
custodian,
transfer agent and accounting service agent that they are also in the
process
of modifying their systems with the same goal. There can, however, be
no assur-
ance that MMC, Smith Barney or any other service provider will be
successful,
or that interaction with other non-complying computer systems will not
impair
Fund services at that time.
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
The Fund may experience high portfolio turnover as a result of its
investment
strategies. Short-term gains realized from portfolio transactions are
taxable
to shareholders as ordinary income. In addition, higher portfolio
turnover
rates can result in corresponding increases in brokerage commissions
for the
Fund. While the Fund does not intend to engage in short-term trading,
it will
not consider portfolio turnover rate a limiting factor in making
investment
decisions consistent with its objectives and policies. 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
portfo-
lio turnover rates for each of the past fiscal years are set forth
under "Fi-
nancial Highlights."
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the New York Stock Exchange (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
9
<PAGE>
VALUATION OF SHARES (CONTINUED)
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 dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income and capital gains realized, in order to avoid a Federal
excise
tax liability. If a shareholder does not otherwise instruct, dividends
and cap-
ital gain distributions will be reinvested automatically in additional
shares
of the same Class at net asset value, with no additional sales charge
or CDSC.
TAXES
The following is a summary of the material federal tax considerations
affect-
ing the Fund and Fund shareholders. Please refer to the Statement of
Additional
Information for further discussion. In addition to the considerations
described
below and in the Statement of Additional Information, there may be
other feder-
al, state, local, and/or foreign tax applications to consider. Because
taxes
are a complex matter, prospective shareholders are urged to consult
their tax
advisors for more detailed information with respect to the tax
consequences of
any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
10
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholders' federal income tax return.
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., Eastern Standard
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
11
<PAGE>
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES (CONTINUED)
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.
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.
12
<PAGE>
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 investment adviser,
distributor,
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-MMC
MMC, located at 388 Greenwich Street, New York, New York 10013,
serves as the
Fund's investment adviser. MMC (through predecessor entities) has been
in the
investment counseling business since 1940 and is a registered
investment advis-
er. MMC renders investment advice to a wide variety of investment
company cli-
ents, which had aggregate assets under management as of March 31, 1998
of
approximately $100.5 billion.
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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 MMC a monthly fee
at the
annual rate of 0.55% of the value of its average daily net assets.
MMC 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 MMC 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 MMC, has served as
Investment Offi-
cer of the Fund since September 1990 and manages the day-to-day
operations of
the Fund, including making investment decisions.
Management's discussion and analysis and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Fund's Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers Group Inc. ("Travelers") announced that
it had
entered into a Merger Agreement with Citicorp. The transaction, which
is
expected
13
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
to be completed during the third quarter of 1988, is subject to various
regu-
latory approvals, including approval by the Federal Reserve Board. The
trans-
action is also subject to approval by the stockholders of each of
Travelers
Group and Citicorp. Upon consummation of the merger, the surviving
corporation
would be a bank holding company subject to regulation under the Bank
Holding
Company Act of 1956 (the "BHCA"), the requirements of the Glass-
Steagall Act
and certain other laws and regulations. Although the effects of the
merger of
Travelers and Citicorp and compliance with the requirements of the BHCA
and
the Glass-Steagall Act are still under review, MMC does not believe
that its
compliance with applicable law following the merger of Travelers and
Citicorp
will have a material adverse effect on its ability to continue to
provide the
Fund with the same level of investment advisory services that it
currently
receives.
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
subsidi-
ary 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, privileges and preferences, except with respect to: (a) the
designa-
tion 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
ongo-
ing 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
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 frac-
14
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
tional 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, National Association, located at 17th and Chestnut Streets
Phila-
delphia, PA 19103, serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
15
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
------------------------
- ---------
A MEMBER OF
TRAVELERSGROUP LOGO
SMITH BARNEY SPECIAL
EQUITIES FUND
388
Greenwich Street
New York, New
York 10013
FD 1009
4/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
APRIL 30,
1998
PROSPECTUS BEGINS ON
PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
April 30,
1998
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Smith Barney Special Equities Fund (the "Fund") seeks long-term
capital
appreciation in a diversified portfolio of common stocks or securities
convert-
ible into or exchangeable for common stocks, primarily of 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 the Smith Barney Investment Funds Inc.
(the "Com-
pany"). 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 Com-
pany 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, 1998 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
MUTUAL MANAGEMENT CORP.
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 18
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
- -------------------------------------------------
PURCHASE OF SHARES 20
- -------------------------------------------------
EXCHANGE PRIVILEGE 30
- -------------------------------------------------
REDEMPTION OF SHARES 33
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 36
- -------------------------------------------------
PERFORMANCE 36
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 37
- -------------------------------------------------
DISTRIBUTOR 38
- -------------------------------------------------
ADDITIONAL INFORMATION 39
- -------------------------------------------------
</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
$15,000,000. 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 $15,000,000. 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
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 $15,000,000. 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 investments 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
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
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 Mutual Management Corp. ("MMC") (formerly known
as
Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment
adviser and administrator. MMC provides investment advisory and
management
services to investment companies affiliated with Smith Barney. MMC is a
wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversi-
fied financial services holding company engaged, through its
subsidiaries,
principally in four business segments: Investment Services, including
Asset
Management, 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 at
least
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
lend-
ing portfolio securities, investing in restricted securities, selling
securi-
ties short and investing in foreign securities through the use of
American
Depositary Receipts ("ADRs"). See "Investment Objective and Management
Poli-
cies--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>
SMITH BARNEY SPECIAL EQUITIES 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 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 0.20 0.19 0.20
0.05
- -----------------------------------------------------------------------
- --------
TOTAL FUND OPERATING EXPENSES 1.20% 1.94% 1.95%
0.80%
- -----------------------------------------------------------------------
- --------
</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%,
depend-
ing 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 Company and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY SPECIAL EQUITIES 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 $86 $113
$188
Class B.................................. 70 91 115
207
Class C.................................. 30 61 105
227
Class Y.................................. 8 26 44
99
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. 62 86 113
188
Class B.................................. 20 61 105
207
Class C.................................. 20 61 105
227
Class Y.................................. 8 26 44
99
- -----------------------------------------------------------------------
- -------
</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 three year period ended December
31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report
thereon appears in the Fund's Annual Report dated December 31, 1997.
The fol-
lowing information for the fiscal years ended December 31, 1988 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>
SMITH BARNEY SPECIAL
EQUITIES FUND 1997 1996(1) 1995 1994(1) 1993(1)
1992(2)
- -----------------------------------------------------------------------
- ----------
<S> <C> <C> <C> <C> <C>
<C>
NET ASSET VALUE,
BEGINNING OF YEAR $28.11 $30.44 $19.10 $20.23 $15.47
$14.13
- -----------------------------------------------------------------------
- ----------
INCOME (LOSS) FROM OPER-
ATIONS:
Net investment loss (0.21) (0.19) (0.27) (0.13) (0.08)
(0.01)
Net realized and
unrealized gain (loss) (1.38) (1.50) 12.37 (1.00) 5.17
1.35
- -----------------------------------------------------------------------
- ----------
Total Income (Loss) From
Operations (1.59) (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 $26.52 $28.11 $30.44 $19.10 $20.23
$15.47
- -----------------------------------------------------------------------
- ----------
TOTAL RETURN (5.66)% (5.81)% 63.48% (5.59)% 32.90%
9.48%++
- -----------------------------------------------------------------------
- ----------
NET ASSETS, END OF YEAR
(MILLIONS) $177 $237 $159 $101 $50
$0.2
- -----------------------------------------------------------------------
- ----------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.20% 1.17% 1.43% 1.49% 1.67%
1.51%+
Net investment loss (0.67) (0.61) (1.05) (0.94) (0.46)
(0.97)+
- -----------------------------------------------------------------------
- ----------
PORTFOLIO TURNOVER RATE 145% 118% 113% 123% 112%
211%
- -----------------------------------------------------------------------
- ----------
AVERAGE COMMISSIONS PAID
PER SHARE ON EQUITY
TRANSACTIONS(3) $0.06 $0.06 $0.06 -- --
- --
- -----------------------------------------------------------------------
- ----------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method,
because
it more accurately reflects the per share data for the period.
(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 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>
SMITH BARNEY SPECIAL EQUITIES
FUND 1997 1996(1) 1995 1994(1)
1993(1)
- -----------------------------------------------------------------------
- -------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE,
BEGINNING OF YEAR $27.28 $29.76 $18.82 $20.08
$15.47
- -----------------------------------------------------------------------
- -------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.45) (0.41) (0.37) (0.27)
(0.20)
Net realized and unrealized gain
(loss) (1.29) (1.43) 12.07 (0.99)
5.14
- -----------------------------------------------------------------------
- -------
Total Income (Loss) From Opera-
tions (1.74) (1.84) 11.70 (1.26)
4.94
- -----------------------------------------------------------------------
- -------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- -- --
- --
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 $25.54 $27.28 $29.76 $18.82
$20.08
- -----------------------------------------------------------------------
- -------
TOTAL RETURN (6.38)% (6.44)% 62.30% (6.27)%
31.93%
- -----------------------------------------------------------------------
- -------
NET ASSETS, END OF YEAR
(MILLIONS) $244 $362 $171 $94
$138
- -----------------------------------------------------------------------
- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.94% 1.91% 2.04% 2.21%
2.34%
Net investment (loss) (1.41) (1.36) (1.61) (1.66)
(1.13)
- -----------------------------------------------------------------------
- -------
PORTFOLIO TURNOVER RATE 145% 118% 113% 123%
112%
- -----------------------------------------------------------------------
- -------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(2) $0.06 $0.06 $0.06 --
- --
- -----------------------------------------------------------------------
- -------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method,
because
it more accurately reflects the per share data for the period.
(2) As of September, 1995, the SEC instituted new guidelines requiring
the
disclosure of average commissions per share.
+ 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>
1992 1991 1990
1989 1988
- -----------------------------------------------------------------------
- ---------------------------------
<S> <C> <C>
<C> <C>
$14.18 $ 9.82 $13.77
$12.04 $11.48
- -----------------------------------------------------------------------
- ---------------------------------
(0.26) (0.07) 0.29
0.28 0.71+
1.55 4.46 (3.70)
1.96 0.70
- -----------------------------------------------------------------------
- ---------------------------------
1.29 4.39 (3.41)
2.24 1.41
- -----------------------------------------------------------------------
- ---------------------------------
-- -- (0.29)
(0.27) (0.55)
-- -- (0.23)
- -- (0.30)
-- (0.03) (0.02)
(0.24) --
- -----------------------------------------------------------------------
- ---------------------------------
-- (0.03) (0.54)
(0.51) (0.85)
- -----------------------------------------------------------------------
- ---------------------------------
$15.47 $14.18 $9.82
$13.77 $12.04
- -----------------------------------------------------------------------
- ---------------------------------
9.10% 44.76% (24.71)%
18.60% 12.60%
- -----------------------------------------------------------------------
- ---------------------------------
$78 $82 $76
$142 $170
- -----------------------------------------------------------------------
- ---------------------------------
2.32% 2.31% 2.30%
2.34% 2.32%
(1.77) (0.74) 2.12
1.69 5.23
- -----------------------------------------------------------------------
- ---------------------------------
211% 379% 372%
228% 165%
- -----------------------------------------------------------------------
- ---------------------------------
-- -- --
- -- --
- -----------------------------------------------------------------------
- ---------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY SPECIAL
EQUITIES FUND 1997 1996(1) 1995 1994(1)
1993(1)(2)
- -----------------------------------------------------------------------
- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $27.28 $29.77 $18.82 $20.08
$22.62
- -----------------------------------------------------------------------
- --------
INCOME (LOSS) FROM OPERA-
TIONS:
Net investment loss (0.45) (0.41) (0.42) (0.25)
(0.16)
Net realized and unrealized
gain (loss) (1.29) (1.44) 12.13 (1.01)
(2.05)
- -----------------------------------------------------------------------
- --------
Total Income (Loss) From
Operations (1.74) (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 $25.54 $27.28 $29.77 $18.82
$20.08
- -----------------------------------------------------------------------
- --------
TOTAL RETURN (6.38)% (6.44)% 62.35% (6.27)%
(9.77)%++
- -----------------------------------------------------------------------
- --------
NET ASSETS, END OF YEAR
(MILLIONS) $19 $26 $9 $2
$0.2
- -----------------------------------------------------------------------
- --------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.95% 1.90% 2.25% 2.15%
2.19%+
Net investment loss (1.42) (1.34) (1.79) (1.60)
(0.98)+
- -----------------------------------------------------------------------
- --------
PORTFOLIO TURNOVER RATE 145% 118% 113% 123%
112%
- -----------------------------------------------------------------------
- --------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS(3) $0.06 $0.06 $0.06 --
- --
- -----------------------------------------------------------------------
- --------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than of the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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 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>
SMITH BARNEY SPECIAL
EQUITIES FUND 1997 1996(1)(2)
- -----------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR $28.21 $28.99
- -----------------------------------------------
INCOME (LOSS) FROM OPER-
ATIONS:
Net investment loss (0.09) (0.08)
Net realized and
unrealized loss (1.40) (0.06)
- -----------------------------------------------
Total Loss From Opera-
tions (1.49) (0.14)
- -----------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains -- (0.28)
Capital -- (0.36)
- -----------------------------------------------
Total Distributions -- (0.64)
- -----------------------------------------------
NET ASSET VALUE, END OF
YEAR $26.72 $28.21
- -----------------------------------------------
TOTAL RETURN (5.28)% (0.75)%++
- -----------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $106 $94
- -----------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.80% 0.82%+
Net investment loss (0.27) (0.29)+
- -----------------------------------------------
PORTFOLIO TURNOVER RATE 145% 118%
- -----------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS $0.06 $0.06
- -----------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method,
because
it more accurately reflects the per share data for the period.
(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 MMC 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 growth companies, generally not within the
Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by
MMC. These
companies may not have reached a fully mature stage of earnings growth,
since
they may still be in the developmental stage, or may be older companies
which
appear to be entering a new stage of more rapid earnings progress due
to fac-
tors such as management change or development of new technology,
products or
markets. A significant number of these companies may be in technology
areas,
including health care related sectors, and may have annual sales of
less than
$300 million. The Fund may also choose to invest in some relatively
unseasoned
stocks, i.e., securities issued by companies whose market
capitalization is
under $100 million.
The Fund also may invest in small capitalization companies
representative of
the broad benchmarks against which the Fund's performance is frequently
judged
by utilizing an active quantitative investment strategy for a portion
of the
Fund. This portion will provide added diversification and, in addition,
MMC
will select securities using a proprietary technique that are believed
to have
a high probability of outperforming their respective industry or
sector. In
identifying these securities, the Fund's Portfolio Manager is supported
by a
quantitatively oriented investment team.
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. Except
for the
Fund's investment objective and those restrictions specifically
identified as
fundamental which may not be changed without a majority vote of
shareholders of
the Fund, all investment policies and practices described in this
Prospectus
and in the Statement of Additional Informa -
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tion are non-fundamental, and may be changed by the Board of Directors
without
shareholder approval.
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
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
MMC, 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
to
evaluate potential risks.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend securities it holds to broker, dealers
and
other financial organizations provided: (a) the loan is secured
continuously
by collateral consisting of U.S. government securities, cash or cash
equiva-
lents 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; and
(c) the
Fund will receive any interest or dividends paid on the loaned
securities.
Futures Contracts and Options on Futures. The Fund may enter into
transac-
tions in futures contracts and options on futures only (i) for bona
fide hedg-
ing purposes (as defined in Commodities Futures Trading Commission
regula-
tions), or (ii) for non-hedging purposes, provided that the aggregate
initial
margin and premiums on such non-hedging positions do not exceed 5% of
the liq-
uidation value of the Fund's assets.
Futures contracts provide for the future sale by one party and
purchase by
another party of specified amount of a specific security at a specified
future
time and at a specified price. The primary purpose of entering into a
futures
contract by the Fund is to protect the Fund from fluctuations in the
value of
securities without actually buying or selling the securities. The Fund
may
enter into futures contracts and options on futures to seek higher
investment
returns when a futures contract is priced more attractively than stocks
com-
prising a benchmark index, to facilitate trading or to reduce
transaction
costs. The Fund will only enter into futures contracts and options on
futures
contracts that are traded on a domestic exchange and board of trade.
Assets
committed to futures contracts will be segregated at the Fund's
custodian to
the extent required by law.
Among the several risks accompanying the utilization of futures
contracts
and options on futures contracts are the following risk. First, the
successful
use of futures and options is dependent upon the ability of MMC to
predict
correctly movements in the stock market or in the direction of interest
rates.
These predictions involve skills and techniques that may be different
from
those involved in the management of investments in securities. If the
prices
of the underlying commodities move in an unanticipated manner, the Fund
may
lose the expected benefit of these futures or options transactions and
may
incur losses. Second, positions in futures
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
contracts and options on futures contracts may only be closed out by
entering
into offsetting transactions on the exchange where the position was
entered
into (or through a linked exchange), and, as a result of daily price
fluctua-
tions limits, there can be no assurance the offsetting transaction
could be
entered into at an advantageous price at a particular time.
Consequently, the
Fund may realize a loss on a futures contract or option that is not
offset by
an increase in the value of its portfolio securities that are being
hedged or
the Fund may not be able to close a futures or options position without
incur-
ring a loss in the event of adverse price movements.
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 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.
Year 2000. The investment management services provided to the Fund by
MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer soft-
ware systems in use today cannot recognize the year 2000, but revert to
1900 or
some other date, due to the manner in which dates were encoded and
calculated.
That failure could have a negative impact on the Fund's operations,
including
the handling of securities trades, pricing and account services. MMC
and Smith
Barney have advised the Fund that they have been reviewing all of their
com-
puter systems and actively working on necessary changes to their
systems to
prepare for the year 2000 and expect that their systems will be
compliant
before that date. In addition, MMC has been advised by the Fund's
custodian,
transfer agent and accounting service agent that they are also in the
process
of modifying their systems with the same goal. There can, however, be
no assur-
ance that MMC,
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Smith Barney or any other service provider will be successful, or that
interac-
tion with other non-complying computer systems will not impair Fund
services at
that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
The Fund may experience high portfolio turnover as a result of its
investment
strategies. Short-term gains realized from portfolio transactions are
taxable
to shareholders as ordinary income. In addition, higher portfolio
turnover
rates can result in corresponding increases in brokerage commissions
for the
Fund. While the Fund does not intend to engage in short-term trading,
it will
not consider portfolio turnover rate a limiting factor in making
investment
decisions consistent with its objectives and policies. 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
portfo-
lio turnover rates for each of the past ten 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
18
<PAGE>
VALUATION OF SHARES (CONTINUED)
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
con-
verted into U.S. dollar values at the mean between the bid and offered
quota-
tions 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 dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income and capital gains realized, in order to avoid a Federal
excise
tax liability. If a shareholder does not otherwise instruct, dividends
and cap-
ital gains distributions will be reinvested automatically in additional
shares
of the same Class at net asset value, with no additional sales charge
or CDSC.
The per share amounts of dividends from net investment income on
Classes B
and C may be lower than that of Classes A and Y, mainly as a result of
the dis-
tribution fees applicable to Class B and C shares. Similarly, the per
share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
TAXES
The following is a summary of the material federal tax considerations
affect-
ing the Fund and Fund shareholders. Please refer to the Statement of
Additional
Information for further discussion. In addition to the considerations
described
below and in the Statement of Additional Information, there may be
other feder-
al, state, local, and/or foreign tax applications to consider. Because
taxes
are a complex matter, prospective shareholders are urged to consult
their tax
advisors for more detailed information with respect to the tax
consequences of
any investment.
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholders' federal income tax return.
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
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shares are sold without an initial sales charge or a CDSC and are
available
only to investors investing a minimum of $15,000,000 (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
shares:
Class Z shares, which are offered without a sales charge, CDSC, service
fee or
distribution fee, exclusively to tax-exempt employee benefit and
retirement
plans of Smith Barney and its affiliates. Investors meeting 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
Summa-
ry--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
sell-
ing 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 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
$15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
par-
ticipants 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
subse-
quent investment requirement for all Classes is $25. For shareholders
purchas-
ing 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 or other funds
affiliated
with Travelers, 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.
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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.
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."
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Members of the selling group may receive up to 90% of the sales
charge and
may be deemed to be underwriters of the Fund as defined in the
Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of
purchases of
Class A shares of the Fund made at one time by "any person," which
includes an
individual 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 or other Travelers-affiliated 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-shar-
ing 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
invest-
ment 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 that 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) 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 registered
invest-
ment advisory subsidiaries of Travelers; (f) direct rollovers by plan
partici-
pants 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; (h) purchases by investors participating in a Smith
Barney
fee-based arrangement; and (i) purchases of Class A Shares by Section
403(b)
or Section 401(a) or (k) accounts associated with Copeland Retirement
Pro-
grams. In order to obtain such discounts, the purchaser must provide
suffi-
cient information at the time of purchase
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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.
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
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 Bar-
ney. In order to obtain such reduced sales charge or to purchase at net
asset
value, the purchaser must provide sufficient information at the time of
pur-
chase 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
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
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 $5,000,000 in Class Y shares
of the
Fund and agree to purchase a total of $15,000,000 of Class Y shares of
the
same Fund within 13 months from the date of the Letter. If a total
investment
of $15,000,000 is not made within the 13-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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shares; and (c) Class A shares 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
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."
<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
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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 First Data
in the
case of all other shareholders) of the shareholder's status or
holdings, as the
case may be.
27
<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.
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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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
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
distribu-
29
<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
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Funds, Inc.--Large Cap Value 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
Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Global 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.
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. MMC 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,
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 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
consti-
tutes 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.
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 the NYSE is closed or as permitted
under
the 1940 Act in extraordinary circumstances. Generally, if the
redemption pro-
ceeds 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
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
purchased by check, other than a certified or official bank check, will
be
remitted upon clearance of the check, which may take up to ten days or
more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a
written request to a Smith Barney Financial Consultant. Shares other
than
those held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or dealer in the selling group
or by
submitting a written request for redemption to:
Smith Barney 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 $10,000 must be guaranteed by
an eli-
gible 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
$10,000 or less do not require a signature guarantee unless more than
one such
redemption request is made in any 10-day period or the redemption
proceeds are
to be sent to an address other than the address of record. Unless
otherwise
directed, redemption proceeds will be mailed to an investor's address
of rec-
ord. 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
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 a
signature guarantee that will be provided by First Data upon request.
(Alter-
natively, 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.)
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 4:00
p.m.
(New York City time) on any day the NYSE is open. Redemption requests
received
after the close of regular trading on the NYSE are priced at the net
asset
value next determined. Redemptions of shares (i) by retirement plans or
(ii)
for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated
by the
shareholder. Generally, redemption proceeds will be mailed or wired, as
the
case may be, on the next business day following the redemption request.
In
order to use the wire procedures, the bank receiving the proceeds must
be a
member of the Federal Reserve System or have a correspondent
relationship with
a member bank. The Fund reserves the right to charge shareholders a
nominal
fee for each wire redemption. Such charges, if any, will be assessed
against
the shareholder's account from which shares were redeemed. In order to
change
the bank account designated to receive redemption proceeds, a
shareholder must
complete a new Telephone/Wire Authorization Form and, for the
protection of
the shareholder's assets, will be required to provide a signature
guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if
the
account registration of the shares of the fund being acquired is
identical to
the registration of the shares of the fund exchanged. Such exchange
requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m.
and 4:00
p.m. (New York City time) on any day on which the NYSE is open.
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
fol-
lowing 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
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Fund. Any applicable CDSC will not be waived on amounts withdrawn by a
share-
holder 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 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 pre-
sented. The current dividend return for each Class may vary from time
to time
depending on market conditions, the composition of its investment
portfolio and
operating expenses. These factors and possible differences in the
methods used
in calculating current
36
<PAGE>
PERFORMANCE (CONTINUED)
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 investment adviser,
distributor,
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--MMC
MMC, located at 388 Greenwich Street, New York, New York 10013,
serves as the
Fund's investment adviser. MMC (through predecessor entities) has been
in the
investment counseling business since 1940. MMC renders investment
advice to a
wide variety of individual, institutional and investment company
clients which
had aggregate assets under management as of March 31, 1998 of
approximately
$100.5 billion.
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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 MMC a monthly fee
at the
annual rate of 0.55% of the value of its average daily net assets.
MMC 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 MMC 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 MMC, has served as
Investment Offi-
cer of the Fund since September 1990 and manages the day-to-day
operations of
the Fund, including making investment decisions.
37
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Management's discussion and analysis and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Fund's Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also sub-
ject to approval by the stockholders of each of Travelers Group and
Citicorp.
Upon consummation of the merger, the surviving corporation would be a
bank
holding company subject to regulation under the Bank Holding Company
Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and
certain other
laws and regulations. Although the effects of the merger of Travelers
and
Citicorp and compliance with the requirements of the BHCA and the
Glass-
Steagall Act are still under review, MMC does not believe that its
compliance
with applicable law following the merger of Travelers and Citicorp will
have a
material adverse effect on its ability to continue to provide the Fund
with the
same level of investment advisory services that it currently receives.
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 Smith Barney Financial Consultants and other persons who provide
support
services in connection with the distribution of shares; interest and/or
carry-
ing charges;
38
<PAGE>
DISTRIBUTOR (CONTINUED)
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 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, National Association, located at 17th and Chestnut Streets,
Phila-
delphia, 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
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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 mat-
ters 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.
40
<PAGE>
SMITH BARNEY
------------------------
- ---------
A Member of
TravelersGroup [LOGO]
SMITH BARNEY
SPECIAL
EQUITIES
FUND
388
Greenwich Street
New York, New
York 10013
FD 0232
4/98
<PAGE>
PROSPECTUS April 30, 1998
- -----------------------------------------------------------------------
- ---------
Smith Barney Investment Funds Inc.
Concert Peachtree Growth Fund
3100 Breckinridge Blvd., Bldg 200
Duluth, Georgia 30099-0062
(800) 544-5445
The Concert Peachtree Growth Fund (the "Fund") seeks capital
appreciation
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, 1998, 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
MUTUAL MANAGEMENT CORP.
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
- -------------------------------------------------
VALUATION OF SHARES 15
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 16
- -------------------------------------------------
PURCHASE OF SHARES 18
- -------------------------------------------------
EXCHANGE PRIVILEGE 23
- -------------------------------------------------
REDEMPTION OF SHARES 24
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 26
- -------------------------------------------------
PERFORMANCE 26
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 27
- -------------------------------------------------
DISTRIBUTOR 29
- -------------------------------------------------
ADDITIONAL INFORMATION 30
- -------------------------------------------------
</TABLE>
- -----------------------------------------------------------------------
- ---------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those
contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by
the 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 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)
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 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 Mutual Management Corp. ("MMC") (formerly Smith
Barney
Mutual Funds Management Inc.) serves as the Fund's investment adviser
and
administrator. MMC provides investment advisory and management services
to
investment companies affiliated with Smith Barney. MMC is a wholly
owned
subsidiary of Salomon 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, including
Asset
Management, 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 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 at
least 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, unless otherwise specified by
an
investor, in additional shares of the same Class at current net asset
value.
Shares acquired by dividend and distribution reinvestments will not be
subject
to any sales charge or CDSC. Class B shares acquired through dividend
and
distribution reinvestments will become eligible for conversion to Class
A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund invests principally in
common
stocks. The prices of common stocks and other securities fluctuate and,
therefore, the value of an investment in the Fund will vary based upon
the
Fund's investment performance. Any income from these investments will
be
incidental to the goal of capital appreciation. The Fund may use
management
techniques and strategies involving options, futures contracts and
options on
futures (which are sometimes referred to as "derivatives"). The
utilization of
these techniques may involve greater than ordinary investment risks and
the
likelihood of more volatile price fluctuation. See "Investment
Objective and
Management Policies."
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>
CONCERT PEACHTREE GROWTH 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.............................................. 0.42
0.42
- -----------------------------------------------------------------------
- ---------
TOTAL FUND OPERATING EXPENSES................................. 1.67%
2.42%
</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
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
case of Class B and certain Class A shares, the length of time the
shares are
held. See "Purchase of Shares" and "Redemption of Shares." PFS receives
an
annual 12b-1 service fee of 0.25% of the value of average daily net
assets of
Class A shares. With respect to Class B shares, PFS receives an annual
12b-1
fee of 1.00% of the value of average daily net assets of that Class,
consist-
ing 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 Company and the Fund."
<TABLE>
<CAPTION>
CONCERT PEACHTREE 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..................................... $66 $100 $136
$238
Class B..................................... 75 105 139
257
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $66 $100 $136
$238
Class B..................................... 25 75 129
257
- -----------------------------------------------------------------------
- -------
</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-
TIVE OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS
THAN THOSE SHOWN ABOVE.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual
report
dated December 31, 1997. 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 EACH YEAR:
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH FUND 1997 1996 1995(1)
- -----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.80 $14.31 $13.36
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.03 0.01 0.03
Net realized and unrealized gain 0.65 1.85 1.87
- -----------------------------------------------------------------
Total Income From Operations 0.68 1.86 1.90
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.11) (0.02)
Net realized gains (1.07) (2.26) (0.93)
- -----------------------------------------------------------------
Total Distributions (1.07) (2.37) (0.95)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.41 $13.80 $14.31
- -----------------------------------------------------------------
TOTAL RETURN 5.18% 13.96% 14.61%++
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $67 $72 $58
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.67% 1.78% 1.72%+
Net investment income 0.22 0.13 0.46 +
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 227% 183% 51%
- -----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.05 $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.
+ Annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH FUND 1997 1996 1995(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.74 $14.27 $13.36
- ----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.07) (0.09) (0.02)
Net realized and unrealized gain 0.64 1.84 1.86
- ----------------------------------------------------------------
Total Income From Operations 0.57 1.75 1.84
- ----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02) --
Net realized gains (1.07) (2.26) (0.93)
- ----------------------------------------------------------------
Total Distributions (1.07) (2.28) (0.93)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.24 $13.74 $14.27
- ----------------------------------------------------------------
TOTAL RETURN 4.40% 13.12% 14.15%++
- ----------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $42 $43 $33
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.42% 2.53% 2.46%+
Net investment loss (0.53) (0.63) (0.27)+
- ----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 227% 183% 51%
- ----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.05 $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.
+ 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 uses a disciplined
manage-
ment style involving computer-aided, quantitative analysis supported by
funda-
mental research to select what it believes to be equity securities of
companies
having prospects of strong sustainable earnings growth and stock price
appreci-
ation. Although the Fund may invest in the stocks of smaller
capitalized compa-
nies, the Fund's assets will be invested primarily in the stock of mid-
and
larger-capitalized companies. 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 MMC for temporary defensive
purposes.
Under such circumstances, the Fund may invest up to 100% of its assets
in
short-term investments which may include repurchase agreements with
domestic
banks or broker-dealers. The Fund may invest up to 35% of its total
assets in
securities of foreign issuers. The Fund may also engage in portfolio
management
strategies and techniques involving options, futures contracts and
options on
futures (which are sometimes referred to as "derivatives"). A
derivative is a
financial instrument whose performance is derived, at least in part,
from the
performance of an underlying asset. The Fund's use of derivatives is
limited to
10% of the Fund's net assets.
Investments in smaller capitalized companies (companies with a
capitalization
of less than $1 billion) may offer greater opportunities for growth of
capital
than larger, more established companies, but may also involve certain
risks
because smaller capitalized companies often have limited product use,
market or
financial resources and may be dependent on one or two people for
management.
In addition, smaller capitalized companies may be subject to a limited
liquid-
ity and more volatility which could result in significant fluctuations
in the
price of their shares.
The Fund may also 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. Except for
the Fund's
investment objective and those restrictions specifically identified as
funda-
mental, which may not be changed without the "vote of a majority of the
out-
standing voting securities", as defined in the Investment Company Act
of 1940,
as amended (the "1940 Act") all investment policies and practices
described in
this Prospectus and in the Statement of Additional Information are non-
funda-
mental and 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. MMC, 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 MMC's expectations concerning
the secu-
rities markets. The purchase and sale of options and futures contracts
involve
risks different from those involved with direct investments in
securities. If
MMC 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
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 MMC to be
liquid
and unencumbered and are marked to market daily pursuant to guidelines
estab-
lished 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 a 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.
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 or other
securities
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
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
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. Consistent with applicable regulatory
require-
ments, the Fund may lend it holds to brokers, dealers and other
financial orga-
nizations securities provided: (a) the loan is secured continuously by
collat-
eral consisting of U.S. government securities or cash or cash
equivalents main-
tained 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; and (c)
the Fund
will receive any interest or dividend paid on the loaned securities.
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.
Year 2000. The investment management services provided to the Fund by
MMC and
the services provided to shareholders by PFS, the Fund's Distributor,
depend on
the smooth functioning of their computer systems. Many computer
software sys-
tems in use today cannot recognize the year 2000, but revert to 1900 or
some
other date, due to the manner in which dates were encoded and
calculated. That
failure could have a negative impact on the Fund's operations,
including the
handling of securities trades, pricing and account services. MMC and
PFS have
advised the Fund that they have been reviewing all of their computer
systems
and actively working on necessary changes to their systems to prepare
for the
year 2000
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and expect that their systems will be compliant before that date. In
addition,
MMC has been advised by the Fund's custodian, transfer agent and
accounting
service agent that they are also in the process of modifying their
systems with
the same goal. There can, however, be no assurance that MMC, PFS or any
other
service provider will be successful, or that interaction with other
non-comply-
ing computer systems will not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
The Fund may experience high portfolio turnover as a result of its
investment
strategies. Short-term gains realized from portfolio transactions are
taxable
to shareholders as ordinary income. In addition, higher portfolio
turnover
rates can result in corresponding increases in brokerage commissions
for the
Fund. While the Fund does not intend to engage in short-term trading,
it will
not consider portfolio turnover rate as a limiting factor in making
investment
decisions consistent with its respective objectives and policies. 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.
See
"Financial Highlights" for the Fund's annual turnover rates during each
year
since inception.
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
15
<PAGE>
VALUATION OF SHARES (CONTINUED)
exchange are valued on the basis of the last sale prior to the time the
valua-
tion is made. If there has been no sale since the immediately previous
valua-
tion, 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 con-
sideration of other factors by or under the direction of the Board of
Direc-
tors. 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 dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income and capital gains realized, in order to avoid a Federal
excise
tax liability. If a shareholder does not otherwise instruct, dividends
and cap-
ital gain distributions will be reinvested automatically in additional
shares
of the same Class at net asset value, with no additional sales charge
or CDSC.
The per share amount of dividends from net investment income on Class
B may be
lower than that of Class A, mainly as a result of the distribution fee
applica-
ble to Class B shares. Capital gain distributions, if any, will be the
same
amount for both Classes of Fund shares (A and B).
TAXES
The following is a summary of the material federal tax considerations
affect-
ing the Fund and Fund shareholders. Please refer to the Statement of
Additional
Infor-
16
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
mation for further discussion. In addition to the considerations
described
below and in the Statement of Additional Information, there may be
other feder-
al, state, local, and/or foreign tax applications to consider. Because
taxes
are a complex matter, prospective shareholders are urged to consult
their tax
advisors for more detailed information with respect to the tax
consequences of
any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholders' federal income tax return.
17
<PAGE>
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 this
prospectus. The completed application should be forwarded to the Sub-
Transfer
Agent, 3100 Breckinridge Blvd., Bldg 200, Duluth, Georgia 30099-0062.
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 or Trustee of any of
the Smith
Barney Mutual Funds or of other funds affiliated with Travelers 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 reg-
ular trading on the NYSE, on any day the Fund calculates its net asset
value,
are priced according to the net asset value determined on that day.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing
shares through a service known as the Systematic Investment Plan. Under
the
Systematic Investment Plan, the Sub-Transfer Agent is authorized
through
preautho-
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
rized 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 shareholders whose 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
------------------------------
CONCERT PEACHREE DEALERS'
GROWTH 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."
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 or other Travelers-affiliated 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-shar-
ing 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
invest-
ment 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
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the reinvestment is made within 60 calendar days of the redemption; (d)
pur-
chases 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
suffi-
cient information at the time of purchase to permit verification that
the pur-
chase would qualify for the elimination of the sales charge.
VOLUME DISCOUNTS
The "Amount of Investment" referred to in the sales charge table set
forth
above under "Initial Sales Charge Alternative--Class A Shares" includes
the
purchase of Class A shares in the Fund and of other funds sponsored by
Smith
Barney that are offered with a sales charge listed under "Exchange
Privilege."
A person eligible for a volume discount includes an individual; members
of a
family unit comprising a husband, wife and minor children; a trustee or
other
fiduciary purchasing for a single fiduciary account including pension,
profit-
sharing and other employee benefit trusts qualified under Section
401(a) of
the Code, or multiple custodial accounts where more than one
beneficiary is
involved if purchases are made by salary reduction and/or payroll
deduction
for qualified and nonqualified accounts and transmitted by a common
employer
entity. Employer entity for payroll deduction accounts may include
trade and
craft associations and any other similar organizations.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an
opportunity for
an investor to obtain a reduced sales charge by aggregating the
investments
over a 13-month period, provided that the investor refers to such
Letter when
placing orders. For purposes of a Letter of Intent, the "Amount of
Investment"
as referred to in the preceding sales charge table includes purchases
of all
Class A shares of the Fund and other funds of the Smith Barney Mutual
Funds
that are offered with a sales charge listed under "Exchange Privilege"
over a
13-month period based on the total amount of intended purchases plus
the value
of all Class A shares previously purchased and still owned. An
alternative is
to compute the 13-month period starting up to 90 days before the date
of exe-
cution of a Letter of Intent. Each investment made during the period
receives
the reduced sales charge applicable to the total amount of the
investment
goal. If the goal is not achieved within the
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
period, the investor must pay the difference between the sales charges
applica-
ble 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 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.
<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
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class B shares converting at the time bears to the total number of
outstanding
Class B shares (other than Class B Dividend Shares) owned by the
shareholder.
In determining the applicability of any CDSC, it will be assumed that
a
redemption is made first of shares representing capital appreciation,
next of
shares representing the reinvestment of dividends and capital gain
distribu-
tions and finally of other shares held by the shareholder for the
longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the
shares
exchanged were initially acquired in one of the other Smith Barney
Mutual
Funds, and Fund shares being redeemed will be considered to represent,
as
applicable, capital appreciation or dividend and capital gain
distribution
reinvestments in such other funds. For Federal income tax purposes, the
amount
of the CDSC will reduce the gain or increase the loss, as the case may
be, on
the amount realized on redemption. The amount of any CDSC will be paid
to PFS.
To provide an example, assume an investor purchased 100 Class B shares
at $10
per share for a cost of $1,000. Subsequently the investor acquired 5
additional
shares through dividend reinvestment. During the fifteenth month after
the pur-
chase, the investor decided to redeem $500 of his or her investment.
Assuming
at the time of the redemption the net asset value had appreciated to
$12 per
share, the value of the investor's shares would be $1,260 (105 shares
at $12
per share). The CDSC would not be applied to the amount which
represents appre-
ciation ($200) and the value of the reinvested dividend shares ($60).
There-
fore, $240 of the $500 redemption proceeds ($500-$260) would be charged
at a
rate of 4% (the applicable rate for Class B shares) for a total
deferred sales
charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege");
(b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month of
the value of the shareholder's shares at the time the withdrawal plan
commences
(see "Redemption of Shares--Automatic Cash Withdrawal Plan"); (c)
redemption of
shares within 12 months following the death or disability of the
shareholder;
(d) redemption of shares made in connection with qualified
distributions from
retirement plans or IRAs upon the attainment of age 59 1/2; (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
sharehold-
er's status or holdings, as the case may be.
22
<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 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 Investment Series--Emerging Growth Fund
.Concert Investment Series--Government Fund
.Concert Investment Series--Growth Fund
.Concert Investment Series--Growth & Income Fund
.Concert Investment Series--International Equity Fund
.Concert Investment Series--Municipal Bond Fund
.Concert Social Awareness Fund
.Smith Barney Appreciation Fund Inc.
.Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
.Smith Barney Concert Allocation Series Inc.--Conservative
Portfolio
.Smith Barney Concert Allocation Series Inc.--Global 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 Investment Grade Bond Fund
*.Smith Barney Money Funds, Inc.--Cash Portfolio
**.Smith Barney Exchange Reserve Fund
* Available for exchange with Class A shares of the Fund
** Available for exchange with Class B shares of the Fund
Class B Exchanges. In the event a Class B shareholder wishes to
exchange all
or a portion of his or her shares in any of the funds imposing a higher
CDSC
than that imposed by the Fund, the exchanged Class B shares will be
subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares
will be
deemed to have been purchased on the same date as the Class B shares of
the
Fund that have been exchanged.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange
transactions
can be detrimental to the Fund's performance and its shareholders. MMC
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, MMC
will
notify PFS that the Fund
23
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
and PFS may, at its discretion, decide to limit additional purchases
and/or
exchanges by the shareholder. Upon such a determination by the Fund,
PFS will
provide notice in writing or by telephone to the shareholder at least
15 days
prior to suspending the exchange privilege and during the 15-day period
the
shareholder will be required to (a) redeem his or her shares in the
Fund or (b)
remain invested in the Fund or exchange into any of the Smith Barney
Mutual
Funds listed under "Exchange Privilege", which position the shareholder
would
be expected to maintain for a significant period of time. All relevant
factors
will be considered in determining what constitutes an abusive pattern
of
exchanges.
Exchanges will be processed at the net asset value next determined.
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 30099-0062. 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
registra-
tion. If the proceeds of the redemption exceed $50,000 or are not to be
paid to
the record owner(s) at the record address, if the shareholder(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 the signature(s) must
be guar-
anteed 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.
24
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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.
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 follow -
25
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
ing 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, 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.
PERFORMANCE
From time to time, the Fund may include its total return, average
annual total
return and current dividend return in advertisements and/or other types
of
sales literature. These figures are computed separately for Class A and
Class B
shares of the Fund. These figures are based on historical earnings and
are not
intended to indicate future performance. Total return is computed for a
speci-
fied period of time assuming deduction of the maximum sales charge, if
any,
from the initial amount invested and reinvestment of all income
dividends and
capital gain distributions on the reinvestment dates at prices
calculated as
stated in this Prospectus, then dividing the value of the investment at
the end
of the period so calculated by the initial amount invested and
subtracting
100%. The standard average annual total return, as prescribed by the
Securities
and Exchange Commission is derived from this total return, which
provides the
ending redeemable value. Such standard total return information may
also be
accompanied with nonstandard total return information for dif -
26
<PAGE>
PERFORMANCE (CONTINUED)
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. 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 com-
paring 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 pursu-
ant to a systematic investment plan to investments made in a rising
market.
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 investment adviser,
distributor,
custodian and transfer agent. The day-to-day operations of the Fund are
dele-
gated to the Fund's investment adviser and administrator. The Statement
of
Additional Information contains background information regarding each
Director
of the Fund and executive officer of the Company.
MMC
MMC, 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. MMC (through its predecessors) has been in the investment
counseling
business since 1940 and is a registered investment adviser. MMC renders
invest-
ment advice to investment companies that had aggregate assets under
management
as of March 31, 1998, of approximately $100.5 billion.
27
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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 MMC a monthly fee at the annual
rate of
1.00% of the value of its average daily net assets up to $250 million
and 0.85%
of the average daily net assets thereafter. 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
Dennis A. Johnson, CFA, a Managing Director of Smith Barney Inc. and
Presi-
dent and Chief Investment Officer of Peachtree Asset Management
("Peachtree"),
a division of MMC, has been the Fund's portfolio manager since August
1997 and
is responsible for managing the day to day investment operations of the
Fund,
including the making of investment decisions. Prior to joining
Peachtree, Mr.
Johnson was Vice President of Trusco Capital.
Management's discussion and analysis, and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also sub-
ject to approval by the stockholders of each of Travelers Group and
Citicorp.
Upon consummation of the merger, the surviving corporation would be a
bank
holding company subject to regulation under the Bank Holding Company
Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and
certain other
laws and regulations. Although the effects of the merger of Travelers
and
Citicorp and compliance with the requirements of the BHCA and the
Glass-
Steagall Act are still under review, MMC does not believe that its
compliance
with applicable law following the merger of Travelers and Citicorp will
have a
material adverse effect on its ability to continue to provide the Fund
with the
same level of investment advisory services that it currently receives.
28
<PAGE>
DISTRIBUTOR
PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30099-
0062. 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:
adver-
tising 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, 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.
29
<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 com-
mon 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 conflicts exist and, if so, take appropriate action.
PNC Bank National Association, located at 17th and Chestnut Streets,
Philadel-
phia, Pennsylvania 19103, serves as custodian of the Fund's
investments.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
PFS Shareholder Services, located at 3100 Breckinridge Blvd, Bldg 200,
Duluth,
Georgia 30099-0062, 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
30
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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 PFS Investments Registered
Representa-
tive 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 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 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.
----------------------
31
<PAGE>
[This page is intentionally left blank]
P R O S P E C T U S
CONCERT
PEACHTREE
GROWTH
FUND
APRIL 30,
1998
PROSPECTUS BEGINS ON
PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
April 30,
1998
Concert Peachtree Growth Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Concert Peachtree Growth Fund (the "Fund") seeks capital
appreciation
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. Shares of other funds offered by the Company are
described in
separate Prospectuses that may be obtained by calling the Company at
the tele-
phone number set forth above or by contacting a Smith Barney Financial
Consul-
tant.
Additional information about the Fund is contained in a Statement of
Addi-
tional Information dated April 30, 1998, 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
MUTUAL MANAGEMENT CORP.
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 13
- -------------------------------------------------
VALUATION OF SHARES 18
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
- -------------------------------------------------
PURCHASE OF SHARES 20
- -------------------------------------------------
EXCHANGE PRIVILEGE 30
- -------------------------------------------------
REDEMPTION OF SHARES 33
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 36
- -------------------------------------------------
PERFORMANCE 36
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 37
- -------------------------------------------------
DISTRIBUTOR 38
- -------------------------------------------------
ADDITIONAL INFORMATION 39
- -------------------------------------------------
</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
$15,000,000. 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 $15,000,000. 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
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 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."
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 $15,000,000. 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
require
-
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
ment 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
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 Mutual Management Corp. ("MMC") (formerly known
as
Smith Barney Mutual Funds Management, Inc.) serves as the Fund's
investment
adviser and administrator. MMC provides investment advisory and
management
services to investment companies affiliated with Smith Barney. MMC is a
wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversi-
fied financial services holding company engaged, through its
subsidiaries
principally in four business segments: Investment Services, including
Asset
Management, 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 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 at
least
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
6
<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,
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>
CONCERT PEACHTREE 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 1.00% 1.00% 1.00%
1.00%
12b-1 Fees** 0.25 1.00 1.00
None
Other Expenses 0.42 0.42 0.41
0.10
- -----------------------------------------------------------------------
- ---------
TOTAL FUND OPERATING EXPENSES 1.67% 2.42% 2.41%
1.10%
</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 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
Clas-
ses, 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 Company and the Fund."
<TABLE>
<CAPTION>
CONCERT PEACHTREE 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..................................... $66 $100 $136
$238
Class B..................................... 75 105 139
257
Class C..................................... 34 75 129
275
Class Y..................................... 11 35 61
134
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $66 $100 $136
$238
Class B..................................... 25 75 129
257
Class C..................................... 24 75 129
275
Class Y..................................... 11 35 61
134
- -----------------------------------------------------------------------
- -----------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A
shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels
of funds with different fee structures over varying investment periods.
To
facilitate such comparison, all funds are required to utilize a 5.00%
annual
return assumption. However, the Fund's actual return will vary and may
be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN
THOSE SHOWN ABOVE.
8
<PAGE>
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, 1997. 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 EACH YEAR:
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH FUND 1997 1996 1995(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.80 $14.31 $13.36
- ----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.03 0.01 0.03
Net realized and unrealized gain 0.65 1.85 1.87
- ----------------------------------------------------------------
Total Income From Operations 0.68 1.86 1.90
- ----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.11) (0.02)
Net realized gains (1.07) (2.26) (0.93)
- ----------------------------------------------------------------
Total Distributions (1.07) (2.37) (0.95)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.41 $13.80 $14.31
- ----------------------------------------------------------------
TOTAL RETURN 5.18% 13.96% 14.61%++
- ----------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $67 $72 $58
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.67% 1.78% 1.72%+
Net investment income 0.22 0.13 0.46+
- ----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 227% 183% 51%
- ----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.05 $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.
+ Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH FUND 1997 1996 1995(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.74 $14.27 $13.36
- ----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.07) (0.09) (0.02)
Net realized and unrealized gain 0.64 1.84 1.86
- ----------------------------------------------------------------
Total Income From Operations 0.57 1.75 1.84
- ----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02) --
Net realized gains (1.07) (2.26) (0.93)
- ----------------------------------------------------------------
Total Distributions (1.07) (2.28) (0.93)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.24 $13.74 $14.27
- ----------------------------------------------------------------
TOTAL RETURN 4.40% 13.12% 14.15%++
- ----------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $42 $43 $33
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.42% 2.53% 2.46%+
Net investment loss (0.53) (0.63) (0.27)+
- ----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 227% 183% 51%
- ----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.05 $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.
+ Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH FUND 1997 1996 1995(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.78 $14.29 $14.05
- ----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.05) (0.08) 0.01
Net realized and unrealized gain 0.62 1.85 1.16
- ----------------------------------------------------------------
Total Income From Operations 0.57 1.77 1.17
- ----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02) --
Net realized gains (1.07) (2.26) (0.93)
- ----------------------------------------------------------------
Total Distributions (1.07) (2.28) (0.93)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.28 $13.78 $14.29
- ----------------------------------------------------------------
TOTAL RETURN 4.38% 13.24% 8.69%++
- ----------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $203 $174 $88
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.41% 2.40% 2.29%+
Net investment income (loss) (0.53) (0.48) 0.13+
- ----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 227% 183% 51%
- ----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.05 $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.
+ Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
DATE
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CONCERT PEACHTREE GROWTH
FUND 1997(/1/)
- -------------------------------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $14.86
- -------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.01
Net realized and
unrealized loss (0.38)
- -------------------------------------
Total Loss From
Operations (0.37)
- -------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (1.07)
- -------------------------------------
Total Distributions (1.07)
- -------------------------------------
NET ASSET VALUE, END OF
YEAR $13.42
- -------------------------------------
TOTAL RETURN (2.25)%++
- -------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $115
- -------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.10%+
Net investment income 0.62+
- -------------------------------------
PORTFOLIO TURNOVER RATE 227%
- -------------------------------------
AVERAGE COMMISSIONS PER
SHARE
PAID ON EQUITY
TRANSACTIONS $0.05
- -------------------------------------
</TABLE>
(1) For the period from October 15, 1997 (inception date) to December
31, 1997.
++Total return is not annualized, as it may not be representative of
the total
return for the year.
+ Annualized.
12
<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 uses a disciplined
manage-
ment style involving computer-aided, quantitative analysis supported by
funda-
mental research to select what it believes to be equity securities of
compa-
nies having prospects of strong sustainable earnings growth and stock
price
appreciation. Although the Fund may invest in the stocks of smaller
capital-
ized companies, the Fund's assets will be invested primarily in the
stock of
mid- and larger-capitalized companies. The Fund may also invest in
companies
in cyclical industries during periods when their securities appear
overly
depressed and therefore attractive for capital appreciation. In
addition to
common stocks of companies, the Fund may invest in securities
convertible into
or exchangeable for common stocks, such as convertible preferred stocks
or
convertible debentures, and warrants.
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 MMC 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
capitaliza-
tion 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 lim-
ited liquidity and more volatility which could result in significant
fluctua-
tions 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.
13
<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
"Invest-
ment Restrictions" in the Statement of Additional Information. Except
for the
Fund's investment objective and those restrictions specifically
identified as
fundamental, which may not be changed without the "vote of a majority
of the
outstanding voting securities", as defined in the Investment Company
Act of
1940, as amended (the "1940 Act"), all investment policies and
practices
described in this Prospectus and in the Statement of Additional
Information are
non-fundamental, and may be changed by the Board of Directors without
share-
holder 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. MMC, 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 MMC's expectations concerning
the secu-
rities markets. The purchase and sale of options and futures contracts
involve
risks different from those involved with direct investments in
securities. If
MMC 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
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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% of the fair market
value of
the Fund's assets. In order to prevent leverage in connection with the
pur-
chase of futures contracts thereon by the Fund, an amount of cash, debt
secu-
rities 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 MMC
to be
liquid and unencumbered, and are marked to market daily, pursuant to
guide-
lines 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
poten-
tial 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
denominated securities, Eurodollar securities and securities issued,
assumed
or guaranteed by a foreign government, political subdivisions or
instrumental-
ities thereof. The Fund will limit its investment in foreign securities
to 35%
of its total assets. Investments in securities of foreign entities and
securi-
ties 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
securities 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 adequately hedge against such fluctuations, affect the value of
securities
in its portfolio. In addition, with respect to certain countries, there
is the
possibility of expropriation of assets, repatriation, confiscatory
taxation,
political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There also may be less publicly available information about a foreign
com-
pany than about a U.S. company and foreign companies may not be subject
to
accounting, auditing and financial reporting standards comparable to
those of
U.S. companies.
The Fund may also purchase foreign securities in the form of American
Depos-
itary Receipts ("ADRs") and European Depositary Receipts or other
securities
rep-
resenting underlying shares of foreign companies. ADRs are publicly
traded on
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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
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 into 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 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. dollar
in relation to a foreign currency by entering into a forward contract
for the
purchase or sale of the amount of foreign currency invested or to be
invested,
or by buying or selling a foreign currency futures contract for such
amount.
Such hedging strategies may be employed before the Fund purchases a
foreign
security traded in the hedged currency which the Fund anticipates
acquiring or
between the date the foreign security is purchased or sold and the date
on
which payment therefor is made or received. Hedging against a change in
the
value of a foreign currency in the foregoing manner does not eliminate
fluctua-
tions in the price of portfolio securities or prevent losses if the
prices of
such securities decline. Furthermore, such hedging transactions reduce
or pre-
clude the opportunity for gain if the value of the
16
<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. Consistent with applicable regulatory
require-
ments, the Fund may lend securities it holds to brokers, dealers and
other
financial organizations provided: (a) the loan is secured continuously
by col-
lateral 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; and (c)
the Fund
will receive any interest or dividend paid on the loaned securities.
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.
Year 2000. The investment management services provided to the Fund by
MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer soft-
ware systems in use today cannot recognize the year 2000, but revert to
1900 or
some other date, due to the manner in which dates were encoded and
calculated.
That failure could have a negative impact on the Fund's operations,
including
the handling of securities trades, pricing and account services. MMC
and Smith
Barney have advised the Fund that they have been reviewing all of their
com-
puter systems and actively working on necessary changes to their
systems to
prepare for the year 2000 and expect that their systems will be
compliant
before that date. In addition, MMC has been advised by the Fund's
custodian,
transfer
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
agent and accounting service agent that they are also in the process of
modify-
ing their systems with the same goal. There can, however, be no
assurance that
MMC, Smith Barney or any other service provider will be successful, or
that
interaction with other non-complying computer systems will not impair
Fund
services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
The Fund may experience high portfolio turnover as a result of its
investment
strategies. Short-term gains realized from portfolio transactions are
taxable
to shareholders as ordinary income. In addition, higher portfolio
turnover
rates can result in corresponding increases in brokerage commissions
for the
Fund. While the Fund does not intend to engage in short-term trading,
it will
not consider portfolio turnover rate as a limiting factor in making
investment
decisions consistent with its objectives and policies. 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. See
"Financial
Highlights" for the Fund's annual turnover rates during each year since
incep-
tion.
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
18
<PAGE>
VALUATION OF SHARES (CONTINUED)
valued at the preceding closing values of such securities on their
respective
exchange, except that when an occurrence subsequent to the time a
foreign secu-
rity 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 cur-
rencies against U.S. dollars as last quoted by any recognized dealer.
Securi-
ties 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 pro-
vided by a pricing service approved by the Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income and capital gains realized, in order to avoid a Federal
excise
tax liability. If a shareholder does not otherwise instruct, dividends
and cap-
ital gain distributions will be reinvested automatically in additional
shares
of the same Class at net asset value, with no additional sales charge
or CDSC.
The per share amounts of dividends from net investment income on
Classes B
and C may be lower than that of Classes A and Y, mainly as a result of
the dis-
tribution fees applicable to Class B and C shares. Similarly, the per
share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
TAXES
The following is a summary of the material federal tax considerations
affect-
ing the Fund and Fund shareholders. Please refer to the Statement of
Additional
Information for further discussion. In addition to the considerations
described
below and in the Statement of Additional Information, there may be
other feder-
al, state, local, and/or foreign tax applications to consider. Because
taxes
are a complex matter, prospective shareholders are urged to consult
their tax
advisors for more detailed information with respect to the tax
consequences of
any investment.
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholders' federal income tax return.
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
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shares are sold without an initial sales charge or CDSC and are
available only
to investors investing a minimum of $15,000,000 (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
sell-
ing 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 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
$15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
par-
ticipants 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
subse-
quent investment requirement for all Classes is $25. For shareholders
purchas-
ing 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 or of other funds
affili-
ated with Travelers 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").
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Orders received by dealers or Introducing Brokers 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,
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
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
insti-
tution indicated by the shareholder to provide systematic additions to
the
shareholder's Fund account. A shareholder who has insufficient funds to
com-
plete the transfer will be charged a fee of up to $25 by Smith Barney
or 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 Bar-
ney 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."
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 or other Travelers-affiliated 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-shar-
ing 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
invest-
ment 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 that 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 in the Smith Barney Mutual Funds that
are
offered with a sales charge) and who wish to reinvest their redemption
pro-
ceeds 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; (h) purchases by investors participating in a Smith
Barney
fee-based arrangement; and (i) purchases of Class A shares by Section
403(b)
or Section 401(a) or (k) accounts associated with Copeland Retirement
Pro-
grams. In order to obtain such discounts, the purchaser must provide
suffi-
cient information at the time of purchase to permit verification that
the pur-
chase would qualify for the elimination of the sales charge.
23
<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 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 requirements. One such requirement is
that the
plan must be open to specified partners or employees of the employer
and its
subsidiaries, if any. Such plan may, but is not required to, provide
for pay-
roll deductions, IRAs or investments pursuant to retirement plans under
Sec-
tion 401 or 408 of the Code. Smith Barney may also offer a reduced
sales
charge or net asset value purchase for aggregating related fiduciary
accounts
under such conditions that Smith Barney will realize economies of sales
efforts and sales related expenses. An individual who is a member of a
quali-
fied group may also purchase Class A shares at the reduced sales charge
appli-
cable to the group as a whole. The sales charge is based upon the
aggregate
dollar value of Class A shares offered with a sales charge that have
been pre-
viously purchased and still owned by the group, plus the amount of the
current
purchase. A "qualified group" is one which (a) has been in existence
for more
than six months, (b) has a purpose other than acquiring Fund shares at
a dis-
count and (c) satisfies uniform criteria which enable Smith Barney to
realize
economies of scale in its costs of distributing shares. A qualified
group must
have more than 10 members, must be available to arrange for group
meetings
between representatives of the Fund and the members, and must agree to
include
sales and other materials related to the Fund in its publications and
mailings
to members at no cost to Smith Barney. In order to obtain such reduced
sales
charge or to purchase at net asset value, the
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
purchaser must provide sufficient information at the time of purchase
to per-
mit verification that the purchase qualifies for the reduced sales
charge.
Approval of group purchase reduced sales charge plans is subject to the
dis-
cretion 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.
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 $5,000,000 in Class Y shares
of the
Fund and agree to purchase a total of $15,000,000 of Class Y shares of
the
Fund within 13 months from the date of the Letter. If a total
investment of
$15,000,000 is not made within the 13-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 purchased without an initial sales
charge but
subject to a CDSC.
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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."
<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. See "Prospectus Summary--Alternative Purchase
Arrangements--Class
B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that
a
redemption is made first of shares representing capital appreciation,
next of
shares representing the reinvestment of dividends and capital gain
distribu-
tions and finally of other shares held by the shareholders for the
longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calcu-
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
lated from the date that the shares exchanged were initially acquired
in one of
the other Smith Barney Mutual Funds, and Fund shares being redeemed
will be
considered to represent, as applicable, capital appreciation or
dividend and
capital gain distribution reinvestments in such other funds. For
Federal income
tax purposes, the amount of the CDSC will reduce the gain or increase
the loss,
as the case may be, on the amount realized on redemption. The amount of
any
CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B
shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
addi-
tional shares through dividend reinvestment. During the fifteenth month
after
the purchase, the investor decided to redeem $500 of his or her
investment.
Assuming at the time of the redemption the net asset value had
appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105
shares
at $12 per share). The CDSC would not be applied to the amount which
represents
appreciation ($200) and the value of the reinvested dividend shares
($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be
charged at a rate of 4.00% (the applicable rate for Class B shares) for
a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege");
(b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month 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
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
and conditions, which are outlined below, are offered to all plans
participat-
ing ("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 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.
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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.
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 sharehold-
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
er'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
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 Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Large Cap Value Fund
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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
Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global--International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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 Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Concert Allocation Series Inc.--Global 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 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. MMC
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, MMC
will
notify Smith Barney and
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney may, at its discretion, decide to limit additional
purchases
and/or exchanges by the shareholder. Upon such a determination, Smith
Barney
will provide notice in writing or by telephone to the shareholder at
least 15
days prior to suspending the exchange privilege and during the 15-day
period
the shareholder will be required to (a) redeem his or her shares in the
Fund or
(b) remain invested in the Fund or exchange into any of the funds of
the Smith
Barney Mutual Funds listed above, which position the shareholder would
be
expected to maintain for a significant period of time. All relevant
factors
will be considered in determining what constitutes an abusive pattern
of
exchanges.
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.
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 the NYSE is closed or as permitted
under
the 1940 Act, in extraordinary circumstances. Generally, if the
redemption pro-
ceeds 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
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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:
Concert Peachtree Growth 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 $10,000 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 $10,000 or
less do
not require a signature guarantee unless more than one such redemption
request
is made in any 10-day period or the redemption proceeds are to be sent
to an
address other than the address of the record. Unless otherwise
directed,
redemption proceeds will be mailed to an investor's address on record.
First
Data may require additional supporting documents for redemptions made
by corpo-
rations, 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
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 com-
mences. 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 4:00
p.m. (New
York City time) on any day the NYSE is open. Redemption requests
received after
the close of regular trading on the NYSE are priced at the net asset
value next
determined. Redemptions of shares (i) by retirement plans or (ii) for
which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated
by the
shareholder. Generally, redemption proceeds will be mailed or wired, as
the
case may be, on the next business day following the redemption request.
In
order to use the wire procedures, the bank receiving the proceeds must
be a
member of the Federal Reserve System or have a correspondent
relationship with
a member bank. The Fund reserves the right to charge shareholders a
nominal fee
for each wire redemption. Such charges, if any, will be assessed
against the
shareholder' account from which shares were redeemed. In order to
change the
bank account designated to receive redemption proceeds, a shareholder
must com-
plete 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 of the shares 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
4:00 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.
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 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 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
histori-
cal earnings and are not intended to indicate future performance. Total
return
is computed for a specified period of time assuming deduction of the
maximum
sales charge, if any, from the initial amount invested and reinvestment
of all
income dividends and capital gain distributions on the reinvestment
dates at
prices calculated as stated in this Prospectus, then dividing the value
of the
investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total
return, as
prescribed by the SEC, is derived from this total return, which
provides the
ending redeemable value. Such standard total return information may
also be
accompanied with nonstandard total return information for differing
periods
computed in the same manner but without annualizing the total return or
taking
sales charges into account. The Fund calculates current dividend return
for
each Class by annualizing the most recent monthly distribution and
dividing by
the net asset value or the maximum public offering price (including
sales
charge) on the last day of the period for which current dividend return
is pre-
sented. The cur-
36
<PAGE>
PERFORMANCE (CONTINUED)
rent dividend return for each Class may vary from time to time
depending on
market conditions, the composition of its investment portfolio and
operating
expenses. These factors and possible differences in the methods used in
calcu-
lating current dividend return should be considered when comparing a
Class'
current return to yields published for other investment companies and
other
investment vehicles. The Fund may also include comparative performance
infor-
mation in advertising or marketing its shares. Such performance
information
may include data from Lipper Analytical Services, Inc. and other
financial
publications.
MANAGEMENT OF THE 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 the Fund's investment
adviser, dis-
tributor, custodian and transfer agent. The day-to-day operations of
the Fund
are delegated to the Fund's investment manager. The Statement of
Additional
Information contains background information regarding each Director of
the
Fund and executive officer of the Company.
MMC
MMC, 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. MMC (through its predecessor entities) has been in the
investment
counseling business since 1940. MMC renders investment advice to
investment
companies that had aggregate assets under management as of March 31,
1998, of
approximately $100.5 billion.
Subject to the supervision and direction of the Company's Board of
Direc-
tors, MMC 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 MMC a monthly fee at the
annual
rate of 1.00% of the value of its average daily net assets up to $250
million
and 0.85% of the average daily net assets thereafter. 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 objectives and policies.
37
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
PORTFOLIO MANAGEMENT
Dennis A. Johnson, CFA, a Managing Director of Smith Barney Inc. and
Presi-
dent and Chief Investment Officer of Peachtree Asset Management
("Peachtree"),
a division of MMC, has been the Fund's portfolio manager since August
1997 and
is responsible for managing the day to day investment operations of the
Fund,
including the making of investment decisions. Prior to joining
Peachtree, Mr.
Johnson was Vice President of Trusco Capital.
Management's discussion and analysis, and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also sub-
ject to approval by the stockholders of each of Travelers Group and
Citicorp.
Upon consummation of the merger, the surviving corporation would be a
bank
holding company subject to regulation under the Bank Holding Company
Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and
certain other
laws and regulations. Although the effects of the merger of Travelers
and
Citicorp and compliance with the requirements of the BHCA and the
Glass-
Steagall Act are still under review, MMC does not believe that its
compliance
with applicable law following the merger of Travelers and Citicorp will
have a
material adverse effect on its ability to continue to provide the Fund
with the
same level of investment advisory services that it currently receives.
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 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
38
<PAGE>
DISTRIBUTOR (CONTINUED)
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
share-
holder 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 pro-
spectuses to potential investors; payments to and expenses of Smith
Barney
Financial Consultants and other persons who provide support services in
connec-
tion 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
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 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 hold -
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
ers 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, located at 17th and Chestnut Streets,
Phila-
delphia, 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.
----------------------
40
<PAGE>
SMITH BARNEY
------------------------
- ---------
A Member of
TravelersGroup [LOGO]
CONCERT
PEACHTREE
GROWTH
FUND
388
Greenwich Street
New York, New
York 10013
FD 0970 4/98
P R O S P E C T U S
SMITH BARNEY
Managed
Growth
Fund
April 30,
1998
PROSPECTUS BEGINS ON
PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS April 30,
1998
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
("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.
("Compa-
ny"). 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. Shares of other funds offered by the Company are
decribed 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 is contained in a Statement of
Addi-
tional Information dated April 30, 1998, 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 ("SEC")
and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
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
- -------------------------------------------------
VALUATION OF SHARES 20
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
- -------------------------------------------------
PURCHASE OF SHARES 22
- -------------------------------------------------
EXCHANGE PRIVILEGE 32
- -------------------------------------------------
REDEMPTION OF SHARES 35
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 38
- -------------------------------------------------
PERFORMANCE 38
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 39
- -------------------------------------------------
DISTRIBUTOR 40
- -------------------------------------------------
ADDITIONAL INFORMATION 41
- -------------------------------------------------
</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
$15,000,000. 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 $15,000,000. 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)
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 Company and the Fund"
for a com-
plete 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) 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, 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."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 $15,000,000. 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 investment
requirements
for the purchase 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
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 Mutual Management Corp. ("MMC") (formerly known
as Smith
Barney Mutual Funds Management Inc.) serves as the Fund's investment
adviser.
MMC provides investment advisory and management services to investment
compa-
nies affiliated with Smith Barney. MMC is a wholly owned subsidiary of
Salomon
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
seg-
ments: Investment Services, including Asset Management, Consumer
Finance Serv-
ices, Life Insurance Services and Property & Casualty Insurance
Services. MMC
also serves as the Fund's administrator. 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 and
distribu-
tions of net realized capital gains, if any, are declared and paid at
least
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>
SMITH BARNEY 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 0.18 0.20 0.19
0.05
- -----------------------------------------------------------------------
- -------
TOTAL FUND OPERATING EXPENSES 1.28% 2.05% 2.04%
0.90%
- -----------------------------------------------------------------------
- -------
</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 Company and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY 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 $89 $117
$197
Class B.................................. 71 94 120
218
Class C.................................. 31 64 110
237
Class Y.................................. 9 29 50
111
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. 62 89 117
197
Class B.................................. 21 64 110
218
Class C.................................. 21 64 110
237
Class Y.................................. 9 29 50
111
- -----------------------------------------------------------------------
- -------
</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
REPRESENTATIVE
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, 1997. 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 EACH YEAR.
<TABLE>
<CAPTION>
SMITH BARNEY MANAGED GROWTH FUND 1997 1996(1) 1995(1)(2)
- -------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.42 $12.03 $12.00
- -------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.08 0.10 0.16
Net realized and unrealized gain 1.77 1.84 0.02
- -------------------------------------------------------------------
Total Income From Operations 1.85 1.94 0.18
- -------------------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income (0.02) (0.09) (0.15)
Net realized gains (1.04) (0.46) --
- -------------------------------------------------------------------
Total Distributions (1.06) (0.55) (0.15)
- -------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.21 $13.42 $12.03
- -------------------------------------------------------------------
TOTAL RETURN 13.70% 16.33% 1.53%++
- -------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $235 $219 $160
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.28% 1.27% 1.19%+
Net investment income 0.55 0.84 2.74+
- -------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 34% 6%
- -------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06 $0.06
- -------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method
because it more accurately reflects the per share data for the
period.
(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 EACH YEAR.
<TABLE>
<CAPTION>
SMITH BARNEY MANAGED GROWTH FUND 1997 1996(1) 1995(1)(2)
- ------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.41 $12.02 $12.00
- ------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.03) 0.01 0.11
Net realized and unrealized gain 1.77 1.84 0.02
- ------------------------------------------------------------------
Total Income From Operations 1.74 1.85 0.13
- ------------------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income -- -- (0.11)
Net realized gains (1.04) (0.46) --
- ------------------------------------------------------------------
Total Distributions (1.04) (0.46) (0.11)
- ------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.11 $13.41 $12.02
- ------------------------------------------------------------------
TOTAL RETURN 12.84% 15.55% 1.16%++
- ------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $547 $485 $300
- ------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.05% 2.03% 1.94%+
Net investment income (loss) (0.22) 0.08 1.99+
- ------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 34% 6%
- ------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06 $0.06
- ------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method
because it more accurately reflects the per share data for the
period.
(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 EACH YEAR.
<TABLE>
<CAPTION>
SMITH BARNEY MANAGED GROWTH FUND 1997 1996(1) 1995(1)(2)
- -------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.41 $12.03 $12.00
- -------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.03) 0.00* 0.11
Net realized and unrealized gain 1.78 1.84 0.03
- -------------------------------------------------------------------
Total Income From Operations 1.75 1.84 0.14
- -------------------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income -- -- (0.11)
Net realized gains (1.04) (0.46) --
- -------------------------------------------------------------------
Total Distributions (1.04) (0.46) (0.11)
- -------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.12 $13.41 $12.03
- -------------------------------------------------------------------
TOTAL RETURN 12.91% 15.45% 1.16%++
- -------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $77 $68 $43
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.04% 2.03% 1.91%+
Net investment income (loss) (0.21) 0.08 2.02+
- -------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 34% 6%
- -------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06 $0.06
- -------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method
because it more accurately reflects the per share data for the
period.
(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
EACH
YEAR.
<TABLE>
<CAPTION>
SMITH BARNEY MANAGED GROWTH FUND 1997 1996(1)(2)
- ----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.43 $12.21
- ----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.16 0.12
Net realized and unrealized gain 1.77 1.69
- ----------------------------------------------------------
Total Income From Operations 1.93 1.81
- ----------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income (0.08) (0.13)
Net realized gains (1.04) (0.46)
- ----------------------------------------------------------
Total Distributions (1.12) (0.59)
- ----------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.24 $13.43
- ----------------------------------------------------------
TOTAL RETURN 14.23% 14.97%++
- ----------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $72 $65
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 0.90% 0.92%
Net investment income 0.92 1.12%
- ----------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 34%
- ----------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06
- ----------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method
because it more accurately reflects the per share data for the
period.
(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 MMC 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.
MMC'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 MMC
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 so that
the Fund may receive a return on its otherwise uninvested cash. When
MMC
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 assurance 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 MMC 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
closing level of the index on the date of exercise, and the time the
Fund is
able to exercise the closing transaction with respect to the long call
posi-
tion it holds.
Futures Contracts and Options on Futures Contracts. A futures
contract pro-
vides for the future sale by one party and the purchase by the other
party of
a certain amount of a specified security at a specified price, date,
time and
place. The Fund may enter into futures contracts to sell securities
when MMC
believes that the value of the Fund's securities will decrease. An
option on a
futures contract, as contrasted with the direct investment in a futures
con-
tract, gives the purchaser the right, in return for the premium paid,
to
assume a position in a futures contract at a specified exercise price
at any
time prior to the expiration date of the option. A call option gives
the pur-
chaser of the option the right to enter into a futures contract to buy
and
obliges the writer to enter into a futures contract to sell the
underlying
securities. A put option gives a purchaser the right to sell and
obliges the
writer to buy the underlying contract. The Fund may enter into futures
con-
tracts to purchase securities when MMC 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 securities 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 MMC to be liquid and unencumbered, and are marked to
market dai-
ly, 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. Consistent with applicable regulatory
requirements, the
Fund is authorized to lend securities it holds to brokers, dealers and
other
financial organizations. 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, con-
sist of possible delays in receiving additional collateral or in the
recovery
17
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
of the securities or possible loss of rights in the collateral should
the bor-
rower fail financially. Loans will be made to firms deemed by MMC to be
of
good standing and will not be made unless, in the judgment of MMC, the
consid-
eration 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
Depositary
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)
A complete list of investment restrictions that the Fund has adopted
includ-
ing restrictions that cannot be changed without the approval of the
Fund's out-
standing shares is contained in the Statement of Additional
Information. Except
for the Fund's investment objective and those restrictions specifically
identi-
fied as fundamental which may not be changed without the "vote of a
majority of
the outstanding voting securities" as defined in the 1940 Act, all
investment
policies and practices described in this Prospectus and in the
Statement of
Additional Information are non-fundamental and may be changed by the
Board of
Directors without shareholder approval.
Year 2000. The investment management services provided to the Fund by
MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer soft-
ware systems in use today cannot recognize the year 2000, but revert to
1900 or
some other date, due to the manner in which dates were encoded and
calculated.
That failure could have a negative impact on the Fund's operations,
including
the handling of securities trades, pricing and account services. MMC
and Smith
Barney have advised the Fund that they have been reviewing all of their
com-
puter systems and actively working on necessary changes to their
systems to
prepare for the year 2000 and expect that their systems will be
compliant
before that date. In addition, MMC has been advised by the Fund's
custodian,
transfer agent and accounting service agent that they are also in the
process
of modifying their systems with the same goal. There can, however, be
no assur-
ance that MMC, Smith Barney or any other service provider will be
successful,
or that interaction with other non-complying computer systems will not
impair
Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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
MMC 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
19
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
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. See "Financial Highlights" for the Fund's annual turnover
rate dur-
ing each year since inception.
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 dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income
20
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
and capital gains realized, in order to avoid a Federal excise tax
liability.
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, with no additional sales charge or CDSC.
The per share amounts of dividends from net investment income on
Classes B and
C may be lower than that of Classes A and Y, mainly as a result of the
distri-
bution fees applicable to Class B and C shares. Similarly, the per
share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
TAXES
The following is a summary of the material federal tax consideration
affecting
the Fund and Fund shareholders. Please refer to the SAI for further
discussion.
In addition to the considerations described below and in the SAI, there
may be
other federal, state, local, and/or foreign tax applications to
consider.
Because taxes are a complex matter, prospective shareholders are urged
to con-
sult their tax advisors for more detailed information with respect to
the tax
consequences of any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of the Code for tax treatment as a regulated invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholders' federal income tax return.
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 $15,000,000 (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 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
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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
main-
tenance 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
$15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
par-
ticipants 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
subse-
quent investment requirement for all Classes is $25. For shareholders
purchas-
ing 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 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
Trust-
ees of any of the Smith Barney Mutual Funds or other funds affiliated
with
Travelers, 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
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
preautho-
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
rized transfers of at least $25 on a monthly basis or at least $50 on a
quar-
terly basis to charge the regular bank account or other financial
institution
indicated by the shareholder on a monthly or quarterly basis to provide
sys-
tematic 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:
<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 or other Travelers-affiliated funds (including retired Board
members and
employees);
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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
repur-
chase; (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 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 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; (h)
purchases by
investors participating in a Smith Barney fee-based arrangement; and
(i) pur-
chases of Class A shares by Section 403(b) or Section 401(a) or (k)
accounts
associated with Copeland Retirement Programs. In order to obtain such
dis-
counts, the purchaser must provide sufficient information at the time
of pur-
chase to permit verification that the purchase would qualify for the
elimina-
tion of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as
defined
above) at a reduced sales charge or at net asset value determined by
aggregat-
ing the dollar amount of the new purchase and the total net asset value
of all
Class A shares of the Fund and of funds sponsored by Smith Barney which
are
offered with a sales charge listed under "Exchange Privilege" then held
by
such person and applying the sales charge applicable to such aggregate.
In
order to obtain such discount, the purchaser must provide sufficient
informa-
tion at the time of purchase to permit verification that the purchase
quali-
fies for the reduced sales charge. The right of accumulation is subject
to
modification or discontinuance at any time with respect to all shares
pur-
chased thereafter.
25
<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 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
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 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 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
26
<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
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
applica-
ble 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 $5,000,000 in Class Y shares of the
Fund
and agree to purchase a total of $15,000,000 of Class Y shares of the
same Fund
within 13 months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13-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. 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
27
<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) 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. See "Prospectus Summary--Alternative Purchase
Arrangements--Class
B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that
a
redemption is made first of shares representing capital appreciation,
next of
shares representing the reinvestment of dividends and capital gain
distribu-
tions and finally of other shares held by the 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 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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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
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
estab-
lished 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)
redemp-
tion 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 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.
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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) 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
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
retirement of an employee in the Participating Plan; (b) the
termination of
employment of an employee in the Participating Plan; (c) the death or
disabil-
ity 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
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Large Cap Value 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 Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global--International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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 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.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
33
<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. MMC
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, MMC
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
34
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 deter-
mining 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 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 Consultant. Shares other
than those
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 Contrarian 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 $10,000 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 $10,000 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.
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
share-
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 4:00
p.m.
(New York City time) on any day the NYSE is open. Redemption requests
received
after the close of regular trading on the NYSE are priced at the net
asset
value next determined. Redemptions of shares (i) by retirement plans or
(ii)
for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated
by the
shareholder. Generally, redemption proceeds will be mailed or wired, as
the
case may be, on the next business day following the redemption request.
In
order to use the wire procedures, the bank receiving the proceeds must
be a
member of the Federal Reserve System or have a correspondent
relationship with
a member bank. The Fund reserves the right to charge shareholders a
nominal
fee for each wire redemption. Such charges, if any, will be assessed
against
the shareholder's account from which shares were redeemed. In order to
change
the bank account designated to receive redemption proceeds, a
shareholder must
complete a new Telephone/Wire Authorization Form and, for the
protection of
the shareholder's assets, will be required to provide a signature
guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if
the
account registration of 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
4:00
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 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
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 Fund may also include comparative performance information
in
advertising or mar-
38
<PAGE>
PERFORMANCE (CONTINUED)
keting 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,
custodian and transfer agent. The day-to-day operations of the Fund are
dele-
gated to the Fund's investment adviser and administrator. The Statement
of Additional Information
contains background information regarding each Director of the Fund and
execu-
tive officer of the Company.
MMC
MMC, 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. MMC renders investment advice to investment companies which
had
aggregate assets under management as of March 31, 1998, of
approximately $100.5
billion.
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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
services rendered, the Fund pays MMC 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
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
John Stoeser has served as Vice President and Investment Officer of
the Fund
and has been responsible for the management of the Fund's assets since
April
1998. Mr. Stoeser was Vice President and Research Analyst of the Fund
since
July 1997. From 1992 until July 1997 Mr. Stoeser was Assistant Vice
President,
Portfolio Manager and Research Analyst with Safeco Asset Management.
39
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Management's discussion and analysis, and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also sub-
ject to approval by the stockholders of each of Travelers Group and
Citicorp.
Upon consummation of the merger, the surviving corporation would be a
bank
holding company subject to regulation under the Bank Holding Company
Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and
certain other
laws and regulations. Although the effects of the merger of Travelers
and
Citicorp and compliance with the requirements of the BHCA and the
Glass-
Steagall Act are still under review, MMC does not believe that its
compliance
with applicable law following the merger of Travelers and Citicorp will
have a
material adverse effect on its ability to continue to provide the Fund
with the
same level of investment advisory services that it currently receives.
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;
40
<PAGE>
DISTRIBUTOR (CONTINUED)
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 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 National Association, 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
41
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
request of shareholders holding at least 10% of the Company's
outstanding
shares and the Company will assist shareholders in calling such a
meeting as
required by the 1940 Act. When matters are submitted for shareholder
vote,
shareholders of each Class will have one vote for each full share owned
and a
proportionate, fractional vote for any fractional share held of that
Class.
Generally, shares of the Company will be voted on a Company-wide basis
on all
matters except matters affecting only the interests of one Fund or one
Class of
shares.
The Fund sends its shareholders a semi-annual report and an audited
annual
report, which include 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.
42
<PAGE>
SMITH BARNEY
------------------------
- ---------
A Member of
TravelersGroup [LOGO]
SMITH
BARNEY
MANAGED
GROWTH
FUND
388
Greenwich Street
New York, New
York 10013
FD 0899
4/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Managed Growth
Fund
Class Z
Shares Only
APRIL 30,
1998
PROSPECTUS BEGINS ON
PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS April 30, 1998
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
("Fund") is long term growth of capital.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Investment Funds
Inc.
("Company"). The Fund is an open-end, diversified management investment
company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the
Company and
the Fund, including expenses, that prospective investors will find
helpful in
making an investment decision. Investors are encouraged to read this
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, 1998, 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 ("SEC")
and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
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 11
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 11
- -------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 13
- -------------------------------------------------
PERFORMANCE 13
- -------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND 14
- -------------------------------------------------
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>
SMITH BARNEY MANAGED GROWTH FUND--CLASS Z
- -------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.85%
Other Expenses 0.07
- -------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.92%
- -------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Company and the Fund." "Other
Expenses" in
the above table include fees for shareholder services, custodial fees,
legal
and accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear directly or
indirectly.
The example assumes payment by the Fund of operating expenses at the
levels set
forth in the table above. See "Purchase and Redemption of Shares" and
"Manage-
ment of the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY 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 in Class Z shares of
the Fund, assuming (1) a 5.00% annual return
and (2) redemption at the end of each time
period: $9 $29 $51
$113
</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
REPRESENTATIVE
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, 1997. 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 EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY CONTRARIAN FUND 1997 1996(1) 1995(1)(2)
- -----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.43 $12.03 $11.83
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.13 0.15 0.04
Net realized and unrealized gain 1.79 1.84 0.32
- -----------------------------------------------------------------
Total Income From Operations 1.92 1.99 0.36
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.07) (0.13) (0.16)
Net realized gains (1.04) (0.46) --
- -----------------------------------------------------------------
Total Distributions (1.11) (0.59) (0.16)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.24 $13.43 $12.03
- -----------------------------------------------------------------
TOTAL RETURN 14.21% 16.69% 3.06%++
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR (Millions) $30 $22 $10
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.92% 0.97% 0.90%+
Net investment income 0.90 1.12 2.30+
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 34% 6%
- -----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS $0.06 $0.06 $0.06
- -----------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average
share
method, which rather than the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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 com-
mon 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 trad-
ing range. Although under normal circumstances the Fund's portfolio
will pri-
marily consist of these securities, the Fund may also invest in
preferred
stocks and warrants when Mutual Management Corp. ("MMC"), (formerly
known as
Smith Barney Mutual Funds Management Inc.), the fund's investment
adviser, per-
ceives 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 instrument 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.
MMC's investment decisions with respect to the Fund's portfolio are
based
upon analysis and research, taking into account, among other factors,
the rela-
tionship of book value to market value of the securities, cash flow,
the multi-
ple of earnings, private market value and the ratio of market
capitalization to
sales. These factors are not applied formulaically, as MMC examines
each secu-
rity 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 so that
the
Fund may receive a return on its otherwise uninvested cash. When MMC
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 assurance that the Fund will be able
to effect
closing purchase transactions at a time when it wishes to
6
<PAGE>
INVESTMENT OBJECTIVE 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 may also
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 MMC to predict the
price
movement of the stock index selected. Therefore, whether the Fund
realizes a
gain or loss from the purchase of options on an index depends upon
movements in
the level of stock prices in the stock market generally. Additionally,
because
exercises
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of index options are settled in cash, a call writer such as the Fund
cannot
determine the amount of the settlement obligations in advance and it
cannot
provide in advance for, or cover, its potential settlement obligations
by
acquiring and holding the underlying securities. When the Fund has
written the
call, there is also a risk that the market may decline between the time
the
Fund has a call exercised against it, at a price which is fixed as of
the
closing level of the index on the date of exercise, and the time the
Fund is
able to exercise the closing transaction with respect to the long call
posi-
tion it holds.
Futures Contracts and Options on Futures Contracts. A futures
contract pro-
vides for the future sale by one party and the purchase by the other
party of
a certain amount of a specified security at a specified price, date,
time and
place. The Fund may enter into futures contracts to sell securities
when MMC
believes that the value of the Fund's securities will decrease. An
option on a
futures contract, as contrasted with the direct investment in a futures
con-
tract, gives the purchaser the right, in return for the premium paid,
to
assume a position in a futures contract at a specified exercise price
at any
time prior to the expiration date of the option. A call option gives
the pur-
chaser of the option the right to enter into a futures contract to buy
and
obliges the writer to enter into a futures contract to sell the
underlying
securities. A put option gives a purchaser the right to sell and
obliges the
writer to buy the underlying contract. The Fund may enter into futures
con-
tracts to purchase securities when MMC 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 securities 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 MMC 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.Consistent with applicable regulatory
requirements, the
Fund is authorized to lend securities it holds to brokers, dealers and
other
financial organizations. 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, con-
sist of possible delays in receiving additional collateral or in the
recovery
of the securities or possible loss of rights in the collateral should
the bor-
rower fail
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
financially. Loans will be made to firms deemed by MMC to be of good
standing
and will not be made unless, in the judgment of MMC, 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%
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.
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.
A complete list of investment restrictions that the Fund has adopted
includ-
ing restrictions that cannot be changed without the approval of the
Fund's
outstanding shares is contained in the Statement of Additional
Information.
Except for the
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fund's investment objective and those restrictions specifically
identified as
fundamental which may not be changed without the "vote of a majority of
the
outstanding voting securities" as defined in the 1940 Act, all
investment poli-
cies and practices described in this Prospectus and in the Statement of
Addi-
tional Information are non-fundamental and may be changed by the Board
of
Directors without shareholder approval.
Year 2000.The investment management services provided to the Fund by
MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer soft-
ware systems in use today cannot recognize the year 2000, but revert to
1900 or
some other date, due to the manner in which dates were encoded and
calculated.
That failure could have a negative impact on the Fund's operations,
including
the handling of securities trades, pricing and account services. MMC
and Smith
Barney have advised the Fund that they have been reviewing all of their
com-
puter systems and actively working on necessary changes to their
systems to
prepare for the year 2000 and expect that their systems will be
compliant
before that date. In addition, MMC has been advised by the Fund's
custodian,
transfer agent and accounting service agent that they are also in the
process
of modifying their systems with the same goal. There can, however, be
no assur-
ance that MMC, Smith Barney or any other service provider will be
successful,
or that interaction with other non-complying computer systems will not
impair
Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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
MMC 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.
See "Financial Highlights" for the Fund's annual turnover rate during
Each year since inception.
10
<PAGE>
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the New York Stock Exchange (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 dividends from net investment
income and,
net realized capital gains, if any, annually. The Fund may also pay
additional
dividends shortly before December 31 from certain amounts of
undistributed
ordinary income and capital gains realized, in order to avoid a Federal
excise
tax liability. If a shareholder does not otherwise instruct, dividends
and cap-
ital gain distributions will be reinvested automatically in additional
shares
of the same Class at net asset value, with no additional sales charge
or CDSC.
TAXES
The following is a summary of the material federal tax considerations
affect-
ing the Fund and Fund shareholders. Please refer to the Statement of
Additional
Information for further discussion. In addition to the considerations
described
below
11
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
and in the Statement of Additional Information, there may be other
federal,
state, local, and/or foreign tax applications to consider. Because
taxes are a
complex matter, prospective shareholders are urged to consult their tax
advi-
sors for more detailed information with respect to the tax consequences
of any
investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
invest-
ment company. In each taxable year that the Fund qualifies, so long as
such
qualification is in the best interests of its shareholders, the Fund
will pay
no federal income tax on its net investment company taxable income and
long-
term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-term
securi-
ties gain, are subject to federal income tax as ordinary income.
Distributions,
if any, from net realized long-term securities gains, derived from the
sale of
securities held by the Fund for more than one year, are taxable as
long-term
capital gains, regardless of the length of time a shareholder has owned
Fund
shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
divi-
dends received deduction. Dividends consisting of interest from U.S.
government
securities may be exempt from state and local income taxes. The Fund
will
inform shareholders of the source and tax status of all distributions
promptly
after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposi-
tion. Losses realized by a shareholder on the disposition of Fund
shares owned
for six months or less will be treated as a long-term capital loss to
the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
share-
holders who do not provide the Fund with a correct taxpayer
identification num-
ber (social security or employer identification number). Withholding
from tax-
able dividends and capital gain distributions also is required for
shareholders
who otherwise are subject to backup withholding. Any tax withheld as a
result
of backup withholding does not constitute an additional tax, and may be
claimed
as a credit on the shareholder's' federal income tax return.
12
<PAGE>
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
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 after the close of regular trading on the NYSE are
priced at
the net asset value as next determined. Shareholders acquiring Class Z
shares
through a Qualified Plan should consult the terms of their respective
plans for
redemption provisions.
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
13
<PAGE>
PERFORMANCE (CONTINUED)
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 composition of its investment portfolio and operating expenses.
These fac-
tors and possible differences in the methods used in calculating
current divi-
dend return should be considered when comparing Class Z shares current
return
to yields published for other investment companies and other investment
vehi-
cles. The Fund may also include comparative performance information in
adver-
tising 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 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,
custodian and transfer agent. The day-to-day operations of the Fund are
dele-
gated to the Fund's investment advisor and administrator. The Statement
of Additional Information
contains background information regarding each Director of the Fund and
execu-
tive officer of the Company.
MMC
MMC, 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. MMC renders investment advice to investment companies, which
had aggregate assets under
management as of March 31, 1998 of approximately $100.5 billion.
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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
services rendered, the Fund pays MMC 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
14
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
that it is comparable to the fee charged by other investment advisers
of
investment companies that have similar investment objectives and
policies.
PORTFOLIO MANAGEMENT
John Stoeser, has served as Vice President and Investment Officer of
the
Fund and has been responsible for the management of the Fund's assets
since
April 1998. Mr. Stoeser was Vice President and Research Analyst of the
Fund
since July 1997. From 1992 until July 1997 Mr. Stoeser was Assistant
Vice
President, Portfolio Manager and Research Analyst with Safeco Asset
Manage-
ment.
Management's discussion and analysis, and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included
in the Annual Report dated December 31, 1997. 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.
On April 6, 1998, Travelers Group Inc. ("Travelers") announced that
it had
entered into a Merger Agreement with Citicorp. The transaction, which
is
expected to be completed during the third quarter of 1998, is subject
to vari-
ous regulatory approvals, including approval by the Federal Reserve
Board. The
transaction is also subject to approval by the stockholders of each of
Travel-
ers Group and Citicorp. Upon consummation of the merger, the surviving
corpo-
ration would be a bank holding company subject to regulation under the
Bank
Holding Company Act of 1956 (the "BHCA"), the requirements of the
Glass-
Steagall Act and certain other laws and regulations. Although the
effects of
the merger of Travelers and Citicorp and compliance with the
requirements of
the BHCA and the Glass-Steagall Act are still under review, MMC does
not
believe that its compliance with applicable law following the merger of
Trav-
elers and Citicorp will have a material adverse effect on its ability
to con-
tinue to provide the Fund with the same level of investment advisory
services
that it currently receives.
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.
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
15
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
Z, 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 des-
ignation 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.
16
<PAGE>
SMITH BARNEY
------------------------
- ---------
A Member of
TravelersGroup [LOGO]
SMITH BARNEY
MANAGED GROWTH
FUND
388
Greenwich Street
New York, New
York 10013
FD01010
4/98
- -----------------------------------------------------------------------
- ---------
Prospectus April
30, 1998
- -----------------------------------------------------------------------
- ---------
Smith Barney Investment Grade Bond Fund
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30099-0062
(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 (the "SAI") dated April 30, 1998,
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 SAI 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
Mutual Management Corp.
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 MISREPRESENTATION 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
18
- -----------------------------------------------------------------------
- ---------
Dividends, Distributions and Taxes
19
- -----------------------------------------------------------------------
- ---------
Purchase of Shares
21
- -----------------------------------------------------------------------
- ---------
Exchange Privilege
25
- -----------------------------------------------------------------------
- ---------
Redemption of Shares
27
- -----------------------------------------------------------------------
- ---------
Minimum Account Size
29
- -----------------------------------------------------------------------
- ---------
Performance
29
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund
30
- -----------------------------------------------------------------------
- ---------
Distributor
32
- -----------------------------------------------------------------------
- ---------
Additional Information
33
- -----------------------------------------------------------------------
- ---------
=======================================================================
=========
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 SAI. 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 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
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."
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.
4
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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. Mutual Management Corp. ("MMC") (formerly known
as Smith
Barney Mutual Funds Management Inc.) serves as the Fund's investment
adviser and
administrator. MMC provides investment advisory and management services
to
investment companies affiliated with Smith Barney. MMC is a wholly
owned
subsidiary of Salomon 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, including
Asset
Management, 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 PFS Shareholder Services (the "Sub-Transfer Agent"). See
"Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are
declared
monthly. Distributions of net realized long-and short-term capital
gains, if
any, are declared and paid at least annually. See "Dividends,
Distributions and
Taxes."
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares
of a Class
will be reinvested automatically in additional shares of the same Class
at
current net asset value unless otherwise specified by an investor.
Shares
acquired by
5
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
dividend and distribution reinvestments will not be subject to any
sales charge
or CDSC. Class B shares acquired through dividend and distribution
reinvestments
will become eligible for conversion to Class A shares on a pro rata
basis. See
"Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS. The Company is designed for
long-term
investors and not for investors who intend to liquidate their
investment after a
short period. Neither the Company as a whole nor any particular fund in
the
Company, including the Fund, constitutes a balanced investment plan.
There can
be no assurance that the Fund will achieve its investment objective.
The Fund
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."
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 0.12
0.11
=======================================================================
=========
TOTAL FUND OPERATING EXPENSES 1.02%
1.51%
=======================================================================
=========
* 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
6
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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.
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 $76 $99
$165
Class B 60 78 92
167
An investor would pay the
following expenses on the
same investment, assuming
the same annual return and
no redemption:
Class A 55 76 99
165
Class B 15 48 82
167
=======================================================================
=========
* 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
representative
of past or future expenses and actual expenses may be greater or less
than those
shown.
7
<PAGE>
(This page intentionally left blank.)
8
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights
- -----------------------------------------------------------------------
- ---------
The following information for the three-year period ended
December 31,
1997 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose
report thereon appears in the Fund's Annual Report dated December 31,
1997. The
following information for the fiscal years ended December 31, 1988
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 1997 1996
1995(1) 1994(1) 1993(1) 1992(2)
=======================================================================
==========================================
<S> <C> <C>
<C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.27 $13.25
$10.67 $13.01 $11.89 $11.67
- -----------------------------------------------------------------------
- ------------------------------------------
Income (Loss) From Operations:
Net investment income 0.80 0.80
0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) 1.20 (0.90)
2.80 (1.88) 1.27 0.23
- -----------------------------------------------------------------------
- ------------------------------------------
Total Income (Loss) From Operations 2.00 (0.10)
3.63 (1.14) 2.15 0.37
- -----------------------------------------------------------------------
- ------------------------------------------
Less Distributions From:
Net investment income (0.80) (0.76)
(0.89) (0.86) (0.89) (0.14)
Net realized gains (0.28) (0.12)
(0.16) (0.31) (0.14) --
Capital -- --
- -- (0.03) -- (0.01)
- -----------------------------------------------------------------------
- ------------------------------------------
Total Distributions (1.08) (0.88)
(1.05) (1.20) (1.03) (0.15)
- -----------------------------------------------------------------------
- ------------------------------------------
Net Asset Value, End of Year $13.19 $12.27
$13.25 $10.67 $13.01 $11.89
- -----------------------------------------------------------------------
- ------------------------------------------
Total Return 17.10% (0.47)%
35.29% (8.95)% 18.45% 3.25%++
- -----------------------------------------------------------------------
- ------------------------------------------
Net Assets, End of Year (millions) $222 $206
$226 $181 $10 $1
- -----------------------------------------------------------------------
- ------------------------------------------
Ratios to Average Net Assets:
Expenses 1.02% 1.04%
1.11% 1.11% 1.11% 1.03%++
Net investment income 6.43 6.63
7.02 7.35 6.67 7.53+
- -----------------------------------------------------------------------
- ------------------------------------------
Portfolio Turnover Rate 39% 48%
49% 18% 65% 47%
=======================================================================
==========================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the
period.
(2) For the period from November 6, 1992 (inception date) to December
31,
1992.
* 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.
9
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a Class B share outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1997 1996 1995(1)
1994(1) 1993(1) 1992 1991
=======================================================================
=======================================
<S> <C> <C> <C>
<C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.29 $13.25 $10.67
$13.01 $11.89 $11.80 $10.43
- -----------------------------------------------------------------------
- ---------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.74 0.77
0.82 0.80 0.83 0.86
Net realized and unrealized
gain (loss) 1.18 (0.90) 2.80
(2.02) 1.29 0.12 1.38
- -----------------------------------------------------------------------
- ---------------------------------------
Total Income (Loss) From Operations 1.93 (0.16) 3.57
(1.20) 2.09 0.95 2.24
- -----------------------------------------------------------------------
- ---------------------------------------
Less Distributions From:
Net investment income (0.75) (0.68) (0.83)
(0.80) (0.83) (0.83) (0.87)
Net realized gains (0.28) (0.12) (0.16)
(0.31) (0.14) -- --
Capital -- -- .--
(0.03) .-- (0.03) --
- -----------------------------------------------------------------------
- ---------------------------------------
Total Distributions (1.03) (0.80) (0.99)
(1.14) (0.97) (0.86) (0.87)
- -----------------------------------------------------------------------
- ---------------------------------------
Net Asset Value, End of Year $13.19 $12.29 $13.25
$10.67 $13.01 $11.89 $11.80
- -----------------------------------------------------------------------
- ---------------------------------------
Total Return++ 16.44% (0.89)% 34.63%
(9.41)% 18.06% 8.36% 22.50%
- -----------------------------------------------------------------------
- ---------------------------------------
Net Assets, End of Year (millions) $249 $258 $289
$221 $476 $432 $414
- -----------------------------------------------------------------------
- ---------------------------------------
Ratios to Average Net Assets:
Expenses 1.51% 1.54% 1.61%
1.57% 1.58% 1.57%* 1.53%
Net investment income 5.95% 6.13 6.51
6.89 6.20 6.99 7.90
- -----------------------------------------------------------------------
- ---------------------------------------
Portfolio Turnover Rate 39% 48% 49%
18% 65% 47% 82%
=======================================================================
=======================================
</TABLE>
Investment Grade Bond Fund 1990 1989 1988
=======================================================================
Net Asset Value, Beginning of Year $11.01 $10.33 $10.55
- -----------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.86 0.87*** 0.90***
Net realized and unrealized
gain (loss) (0.57) 0.68 (0.24)
- -----------------------------------------------------------------------
Total Income (Loss) From Operations 0.29 1.55 0.66
- -----------------------------------------------------------------------
Less Distributions From:
Net investment income (0.87) (0.87) (0.88)
Net realized gains -- -- --
Capital -- -- .--
- -----------------------------------------------------------------------
Total Distributions (0.87) (0.87) (0.88)
- -----------------------------------------------------------------------
Net Asset Value, End of Year $10.43 $11.01 $10.33
- -----------------------------------------------------------------------
Total Return++ 2.98% 15.57% 6.43%
- -----------------------------------------------------------------------
Net Assets, End of Year (millions) $406 $483 $533
- -----------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.58% 1.63%** 1.22%**
Net investment income 8.20 8.07 8.74
- -----------------------------------------------------------------------
Portfolio Turnover Rate 59% 118% 72%
=======================================================================
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data of the
period.
* 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 & 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 Service Inc. ("Moody's") and Standard &
Poor's
Ratings Group ("S&P") is contained in the Appendix to the Statement of
Additional Information.
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's investment objective may not be changed without the
approval
of the vote of a majority of the Fund's outstanding voting securities
as defined
in the Investment Company Act of 1940 (the "1940 Act".) 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 by a nationally recognized statistical
rating
organization ("NRSRO") within one of the four highest rating categories
of their
class. The Fund will invest primarily in the following securities:
corporate
bonds rated in the highest four categories for debt securities by an
NRSRO (such
as 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
in the
top two categories for short-term debt securities by an NRSRO (such as
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 in the highest two
ratings
categories for debt securities by an NRSRO (such as 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
(such as Baa by Moody's or BBB by S&P) may have speculative
characteristics and
changes in economic conditions or other circumstances are more likely
to lead to
a weakened capacity to make principal and interest payments, including
a greater
possibility of default or bankruptcy of the issuer, than is the case
with higher
grade bonds. Subsequent to its purchase by the Fund, an issue of
securities may
cease to be rated or its rating may be reduced below the minimum
required for
purchase by the Fund. In addition, it is possible that Moody's, S&P and
other
NRSROs 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 MMC will consider these events in determining
whether the
Fund should continue to hold the securities.
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,
12
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
MMC 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 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 SAI.
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;
13
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
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
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
14
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
losing all or part of the income from the agreement. MMC, 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 MMC 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 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 331/3% 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. Consistent with applicable
regulatory
requirements, the Fund may lend securities it holds to brokers, dealers
and
other financial organizations 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; and (c) the
Fund will
receive any interest or dividends paid on the loaned securities. 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
MMC to be
in good standing and will not be made unless, in the judgement of MMC,
the
consideration to be earned from such loans would justify the risk.
15
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
Interest Rate Futures Contracts The Fund may purchase and sell
interest
rate futures contracts ("futures contracts") as a hedge against changes
in
interest rates. A futures contract is an agreement between two parties
to buy
and sell a security for a set price on a future date. Futures contracts
are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there
are
futures contracts based on securities such as long-term Treasury bonds,
Treasury
notes, GNMA Certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of
outstanding
debt securities declines (and vice versa). Entering into a futures
contract for
the sale of securities has an effect similar to the actual sale of
securities,
although the sale of the futures contract might be accomplished more
easily and
quickly. For example, if the Fund holds long-term U.S. government
securities and
MMC 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 MMC
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.
16
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
The Fund may not purchase futures contracts or related options
if,
immediately thereafter, more than 30% of the Fund's total assets would
be so
invested. In purchasing and selling futures contracts and related
options, the
Fund will comply with rules and interpretations of the Commodity
Futures Trading
Commission ("CFTC"), under which the Company is excluded from
regulation as a
"commodity pool." CFTC regulations permit use of commodity futures and
options
for bona fide hedging purposes without limitations on the amount of
assets
committed to margin and option premiums.
The Fund will not engage in transactions involving futures
contracts or
related options for speculation but only as a hedge against changes in
the
market values of debt securities held, or intended to be purchased, by
the Fund
and where the transactions are appropriate to reduction of the Fund's
risks. The
Fund's futures transactions will be entered into for traditional
hedging
purposes -- that is, futures contracts will be sold (or related put
options
purchased) to protect against a decline in the price of securities that
the Fund
owns, or futures contracts (or related call options) will be purchased
to
protect the Fund against an increase in the price of securities it is
committed
to purchase.
There is no assurance that the Fund will be able to close out its
futures
positions at any time, in which case it would be required to maintain
the margin
deposits on the contract. There can be no assurance that hedging
transactions
will be successful, 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.
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.
17
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
Year 2000. The investment management services provided to the
Fund by MMC
and the services provided to shareholders by PFS, the Fund's
Distributor, depend
on the smooth functioning of their computer systems. Many computer
software
systems in use today cannot recognize the year 2000, but revert to 1900
or some
other date, due to the manner in which dates were encoded and
calculated. That
failure could have a negative impact on the Fund's operations,
including the
handling of securities trades, pricing and account services. MMC and
Smith
Barney have advised the Fund that they have been reviewing all of their
computer
systems and actively working on necessary changes to their systems to
prepare
for the year 2000 and expect that their systems will be compliant
before that
date. In addition, MMC has been advised by the Fund's custodian,
transfer agent
and accounting service agent that they are also in the process of
modifying
their systems with the same goal. There can, however, be no assurance
that MMC,
PFS or any other service provider will be successful, or that
interaction with
other non-complying computer systems will not impair Fund services at
that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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."
- -----------------------------------------------------------------------
- ---------
Valuations 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
18
<PAGE>
- -----------------------------------------------------------------------
- ---------
Valuarion of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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's policy is to declare and pay monthly dividends from
its net
investment income. Dividends from net realized capital gains, if any,
will be
distributed annually. The Fund may also pay additional dividends
shortly before
December 31 from certain amounts of undistributed ordinary income and
capital
gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain
distributions will be automatically reinvested in additional same Class
shares
at the appropriate net asset value, with no additional sales charge or
CDSC.
The per share amount of dividends from net investment income on
Classes B
and C may be lower than that of Classes A and Y, mainly as a result of
the
distribution fee applicable to Class B and C shares. Similarly, the per
share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
TAXES
The following is a summary of the material federal tax
considerations
affecting
19
<PAGE>
- -----------------------------------------------------------------------
- ---------
Dividends, Distributions and Taxes (continued)
- -----------------------------------------------------------------------
- ---------
the Fund and Fund shareholders. Please refer to the SAI for further
discussion.
In addition to the considerations described below and in the SAI, there
may be
other federal, state, local, and/or foreign tax applications to
consider.
Because taxes are a complex matter, prospective shareholders are urged
to
consult their tax advisors for more detailed information with respect
to the tax
consequences of any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a
regulated
investment company. In each taxable year that the Fund qualifies, so
long as
such qualification is in the best interests of its shareholders, the
Fund will
pay no federal income tax on its net investment company taxable income
and
long-term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-
term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains,
derived
from the sale of securities held by the Fund for more than one year,
are taxable
as long-term capital gains, regardless of the length of time a
shareholder has
owned Fund shares.
Shareholders are required to pay tax on all taxable
distributions, even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
dividends received deduction. Dividends consisting of interest from
U.S.
government securities may be exempt from state and local income taxes.
The Fund
will inform shareholders of the source and tax status of all
distributions
promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of
Fund shares
owned for six months or less will be treated as a long-term capital
loss to the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of
all taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer
identification
number (social security or employer identification number). Withholding
from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax
withheld
as a result of backup withholding does not constitute an additional
tax, and may
be claimed as a credit on the shareholders' federal income tax return.
20
<PAGE>
- -----------------------------------------------------------------------
- ---------
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
this prospectus. The completed application should be forwarded to the
Sub-Transfer Agent, 3100 Breckinridge Blvd., Bldg 200, Duluth, Georgia
30099-0062. 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
subsequent investment requirement for both Classes in the Fund is $25.
For the
Fund's Systematic Investment Plan the minimum initial subsequent
investment
requirement for both classes 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
or of
other funds affiliated with Travelers 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
21
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 a shareholder whose 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:
Sales Sales
Dealer's
Charge as % Charge as %
Reallowance as %
Amount of Investment of Offering Price of 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 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".
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 or other Travelers-affiliated 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 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
22
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 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
23
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 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 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
24
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
(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 591/2; (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
25
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 Investment Series -- Emerging Growth Fund
o Concert Investment Series -- Government Fund
o Concert Investment Series -- Growth Fund
o Concert Investment Series -- Growth and Income Fund
o Concert Investment Series -- International Equity Fund
o Concert Investment Series -- Municipal Bond Fund
o Concert Peachtree Growth Fund
o Concert Social Awareness Fund
o Smith Barney Appreciation Fund Inc.
o Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
o Smith Barney Concert Allocation Series Inc. -- Conservative
Portfolio
Smith Barney Concert Allocation Series Inc. -- Global 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 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.
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. MMC 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 MMC 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
26
<PAGE>
- -----------------------------------------------------------------------
- ---------
Exchange Privilege (continued)
- -----------------------------------------------------------------------
- ---------
maintain for a significant period of time. All relevant factors will be
considered in determining what constitutes an abusive pattern of
exchanges.
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 30099-0062. 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 are
not to be
paid to the record owner(s) at the record address, if the
shareholder(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, the
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,
27
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 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
28
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
accounts are eligible for automatic cash withdrawal plans only where
the share
holder 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.
- -----------------------------------------------------------------------
- ---------
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
29
<PAGE>
- -----------------------------------------------------------------------
- ---------
Performance (continued)
- -----------------------------------------------------------------------
- ---------
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.
- -----------------------------------------------------------------------
- ---------
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 its distributor, investment adviser,
custodian and
transfer agent. The day-to-day operations of the Fund are delegated to
the
Fund's investment adviser and administrator. The SAI contains general
and
background information regarding each Director of the Fund and
executive officer
of the Company.
INVESTMENT ADVISER
MMC, located at 388 Greenwich Street, New York, New York 10013,
serves as
the Fund's investment adviser. MMC (through its predecessor entities)
has been
in the investment counseling business since 1940 and is a registered
investment
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of March 31, 1998 of approximately
$100.5
billion.
30
<PAGE>
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fundf (continued)
- -----------------------------------------------------------------------
- ---------
Subject to the supervision and direction of the Fund's Board of
Directors,
MMC 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 MMC 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, 1997, MMC 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, 1997 is
included in the Annual Report dated December 31, 1997. 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.
ADMINISTRATOR
MMC 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 up to $500 million and 0.18% of the average
daily net
assets thereafter.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also subject
to approval by the stockholders of each of Travelers Group and
Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank
holding
company subject to regulation under the Holding Company Act of 1956
(the
"BCHA"), the requirements of the Glass-Steagall Act and certain other
laws and
regulations. Although the effects of the merger of Travelers and
Citicorp and
compliance with the requirements of the BCHA and the Glass-Steagall Act
are
still under review, Salomon Brothers Asset Management does not believe
that its
compliance with applicable law following the merger of Travelers and
Citicorp
will have a material adverse effect on its ability to continue to
provide the
Fund with the same level of investment advisory services that it
currently
receives.
31
<PAGE>
- -----------------------------------------------------------------------
- ---------
Distributor
- -----------------------------------------------------------------------
- ---------
PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia
30099-0062.
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.
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.
32
<PAGE>
- -----------------------------------------------------------------------
- ---------
Addtional 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, located at 17th and Chestnut
Streets,
Philadelphia, PA 10103, serves as custodian of the Fund's investments.
Fist Data Investor Services Group, Inc. located at Exchange
Place, Boston,
Massachusetts 02109 serves as the Fund's transfer agent.
PFS Shareholder Services located at 3100 Breckinridge Blvd.,
Bldg. 200,
Duluth, Georgia 30099-0062, 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 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 their PFS
Investments
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 multiple years
worth of
information, there is a $15 charge for each Account Transcript
requested.
33
<PAGE>
- -----------------------------------------------------------------------
- ---------
Additional Information (continued)
- -----------------------------------------------------------------------
- ---------
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 1-800-544-
5445.
34
PROSPECTUS
SMITH BARNEY
Government
Securities
Fund
April
30, 1998
Prospectus begins on
page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus April
30, 1998
- -----------------------------------------------------------------------
- ---------
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 (the "SAI") dated April 30, 1998,
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
SAI 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
Mutual Management Corp.
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
10
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies
17
- -----------------------------------------------------------------------
- ---------
Valuation of Shares
25
- -----------------------------------------------------------------------
- ---------
Dividends, Distributions and Taxes
25
- -----------------------------------------------------------------------
- ---------
Purchase of Shares
27
- -----------------------------------------------------------------------
- ---------
Exchange Privilege
36
- -----------------------------------------------------------------------
- ---------
Redemption of Shares
39
- -----------------------------------------------------------------------
- ---------
Minimum Account Size
42
- -----------------------------------------------------------------------
- ---------
Performance
42
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund
43
- -----------------------------------------------------------------------
- ---------
Distributor
45
- -----------------------------------------------------------------------
- ---------
Additional Information
45
- -----------------------------------------------------------------------
- ---------
=======================================================================
=========
No person has been authorized to give any information or to make any
representations in connection with this offering other than those
contained in
this Prospectus and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund
or the
distributor to sell or a solicitation of an offer to buy any of the
securities
offered hereby in any jurisdiction to any person to whom it is unlawful
to make
such an offer or solicitation in such jurisdiction.
=======================================================================
=========
2
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary
- -----------------------------------------------------------------------
- ---------
The following summary is qualified in its entirety by detailed
information
appearing elsewhere in this Prospectus and in the SAI. 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
$15,000,000.
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.
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 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 $15,000,000. 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 purchase. The $500,000 investment may be met by adding the
purchase
to the net
4
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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."
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 $15,000,000. 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
5
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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 Mutual Management Corp. ("MMC") (formerly known
as Smith
Barney Mutual Funds Management Inc.) serves as the Fund's investment
adviser and
administrator. MMC provides investment advisory and management services
to
investment companies affiliated with Smith Barney. MMC is a wholly
owned
subsidiary of Salomon 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, including
Asset
Management, 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."
Dividends and Distributions Dividends from net investment income are
declared
monthly. Distributions of net realized long- and short-term capital
gains, if
any, are declared and paid at least 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
6
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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."
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>
Government Securities 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 0.55% 0.55%
0.55% 0.55%
12b-1 fees** 0.25 0.75
0.70 None
Other expenses 0.12 0.14
0.14 0.03
- -----------------------------------------------------------------------
- ----------------
TOTAL FUND OPERATING EXPENSES 0.92% 1.44%
1.39% 0.58%
=======================================================================
================
</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.
7
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
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. 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."
Government Securities 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 $54 $73 $94
$153
Class B 60 76 89
158
Class C 24 44 76
167
Class Y 6 19 32
73
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A 54 73 94
153
Class B 15 46 79
158
Class C 14 44 76
167
Class Y 6 19 32
73
- -----------------------------------------------------------------------
- ---------
* 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.
8
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
The example also provides a means for the investor to compare
expense levels
of funds with different fee structures over varying investment periods.
To
facilitate such comparison, all funds are required to utilize a 5.00%
annual
return assumption. However, the Fund's actual return will vary and may
result in
an actual return greater or less than 5.00%. This example should not be
considered a representation of past or future expenses and actual
expenses may
be greater or less than those shown.
9
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights
- -----------------------------------------------------------------------
- ---------
The following information for the three-year period ended December
31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report
thereon appears in the Fund's Annual Report dated December 31, 1997.
The
following information for the fiscal years ended December 31, 1988
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 share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Government Securities Fund
Class A Shares 1997 1996 1995(1)
1994 1993(1) 1992(2)
=======================================================================
============================
<S> <C> <C> <C>
<C> <C> <C>
Net Asset Value, Beginning of Year $9.34 $9.77 $9.17
$10.01 $9.69 $9.56
- -----------------------------------------------------------------------
- ----------------------------
Income (Loss) From Operations:
Net investment income (3) 0.59 0.61 0.67
0.52 0.81 0.10
Net realized and unrealized gain (loss) 0.42 (0.44) 0.62
(0.80) 0.23 0.13
- -----------------------------------------------------------------------
- ----------------------------
Total Income (Loss) From Operations 1.01 0.17 1.29
(0.28) 1.04 0.23
- -----------------------------------------------------------------------
- ----------------------------
Less Distributions From:
Net investment income (0.60) (0.59) (0.69)
(0.49) (0.72) (0.08)
Capital -- (0.01) --
(0.07) -- (0.02)
- -----------------------------------------------------------------------
- ----------------------------
Total Distributions (0.60) (0.60) (0.69)
(0.56) (0.72) (0.10)
- -----------------------------------------------------------------------
- ----------------------------
Net Asset Value, End of Year $9.75 $9.34 $9.77
$9.17 $10.01 $9.69
- -----------------------------------------------------------------------
- ----------------------------
Total Return 11.23% 1.96% 14.50%
(2.76)% 10.87% 2.41%++
- -----------------------------------------------------------------------
- ----------------------------
Net Assets, End of Year (millions) $ 361 $ 389 $ 453
$ 482 $ 7 $ 0.3
- -----------------------------------------------------------------------
- ----------------------------
Ratios to Average Net Assets:
Expenses (3) (4) 0.92% 0.93% 0.94%
1.00% 0.92% 0.68%+
Net investment income 6.24 6.16 6.70
6.18 7.76 6.24+
- -----------------------------------------------------------------------
- ----------------------------
Portfolio Turnover Rate 274% .420% 294%
276% 540% 426%
=======================================================================
============================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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.
10 & 11
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Government Securities Fund
Class B Shares 1997 1996 1995(1)
1994 1993(1) 1992 1991 1990 1989 1988
=======================================================================
===========================================================
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.38 $9.81 $9.17
$10.01 $9.68 $9.81 $9.11 $9.25 $8.75 $8.90
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.54 0.56 0.59
0.46 0.73 0.53 0.70 0.68 0.70 0.75
Net realized and unrealized
gain (loss) 0.44 (0.44) 0.65
(0.78) 0.27 (0.02) 0.71 (0.08) 0.53 (0.16)
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Total Income (Loss) From Operations 0.98 0.12 1.24
(0.32) 1.00 0.51 1.41 0.60 1.23 0.59
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Less Distributions From:
Net investment income (0.57) (0.54) (0.60)
(0.45) (0.67) (0.53) (0.63) (0.68) (0.70) (0.74)
Capital -- (0.01) --
(0.07) -- (0.11) (0.08) (0.06) (0.03) --
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Total Distributions (0.57) (0.55) (0.60)
(0.52) (0.67) (0.64) (0.71) (0.74) (0.73) (0.74)
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Net Asset Value, End of Year $ 9.79 $9.38 $9.81
$9.17 $10.01 $9.68 $9.81 $9.11 $9.25 $8.75
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Total Return 10.82% 1.42% 13.87%
(3.25)% 10.45% 5.45% 16.28% 6.99% 14.58% 6.75%
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Net Assets, End of Year (millions) $ 101 $ 122 $ 158 $
173 $ 851 $1,047 $1,286 $1,521 $2,002 $2,736
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) (3) 1.44% 1.45% 1.45%
1.48% 1.40% 1.45% 1.40% 1.43% 1.40% 1.34%
Net investment income 5.73 5.64 6.19
5.69 7.28 5.47 6.80 7.60 7.79 8.00
- -----------------------------------------------------------------------
- -----------------------------------------------------------
Portfolio Turnover Rate 274% 420% .294%
.276% 540% 426% 326% 274% 352% 281%
=======================================================================
===========================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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 would have been 1.74%,
1.55% and
1.71%, respectively.
12 & 13
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Government Securities Fund
Class C Shares 1997 1996 1995(1)
1994 1993(1)(2)
=======================================================================
=================
<S> <C> <C> <C>
<C> <C>
Net Asset Value, Beginning of Year $9.38 $9.81 $9.17
$10.01 $9.90
- -----------------------------------------------------------------------
- -----------------
Income (Loss) From Operations:
Net investment income (3) 0.54 0.57 0.60
0.49 0.68
Net realized and unrealized gain (loss) 0.43 (0.44) 0.65
(0.81) 0.04
- -----------------------------------------------------------------------
- -----------------
Total Income (Loss) From Operations 0.97 0.13 1.25
(0.32) 0.72
- -----------------------------------------------------------------------
- -----------------
Less Distributions From:
Net investment income (0.57) (0.55) (0.61)
(0.45) (0.61)
Capital -- (0.01) --
(0.07) --
- -----------------------------------------------------------------------
- -----------------
Total Distributions (0.57) (0.56) (0.61)
(0.52) (0.61)
- -----------------------------------------------------------------------
- -----------------
Net Asset Value, End of Year $9.78 $9.38 $9.81
$9.17 $10.01
- -----------------------------------------------------------------------
- -----------------
Total Return 10.75% 1.47% 13.93%
(3.25)% 7.36%++
- -----------------------------------------------------------------------
- -----------------
Net Assets, End of Year (000s) $2,311 $1,443 $1,039
$ 646 $ 213
- -----------------------------------------------------------------------
- -----------------
Ratios to Average Net Assets:
Expenses (3) (4) 1.39% 1.38% 1.37%
1.47% 1.40%+
Net investment income 5.70 5.71 6.27
5.71 7.28+
- -----------------------------------------------------------------------
- -----------------
Portfolio Turnover Rate 274% 420% .294%
.276% 540%
=======================================================================
=================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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% (annualized).
(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 would have been 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.
14 & 15
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a share of capital stock outstanding throughout each year:
Government Securities Fund
Class Y Shares 1997
1996(1)
=======================================================================
=========
Net Asset Value, Beginning of Year $ 9.34 $
9.71
- -----------------------------------------------------------------------
- ---------
Income From Operations:
Net investment income 0.61
0.57
Net realized and unrealized gain (loss) 0.44
(0.37)
- -----------------------------------------------------------------------
- ---------
Total Income From Operations 1.05
0.20
- -----------------------------------------------------------------------
- ---------
Less Distributions From:
Net investment income (0.63)
(0.56)
Capital --
(0.01)
- -----------------------------------------------------------------------
- ---------
Total Distributions (0.63)
(0.57)
- -----------------------------------------------------------------------
- ---------
Net Asset Value, End of Year $ 9.76 $
9.34
- -----------------------------------------------------------------------
- ---------
Total Return 11.73%
2.30%++
- -----------------------------------------------------------------------
- ---------
Net Assets, End of Year (000s) $109,909
$39,667
- -----------------------------------------------------------------------
- ---------
Ratios to Average Net Assets:
Expenses 0.58%
0.44%+
Net investment income 6.46
6.49+
- -----------------------------------------------------------------------
- ---------
Portfolio Turnover Rate 274%
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.
16
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies
- -----------------------------------------------------------------------
- ---------
INVESTMENT OBJECTIVE
The investment objective of the Fund is high current return. The
Fund's
investment objective may not be changed without the "vote of a majority
the
outstanding voting securities" as defined in the Investment Company Act
of 1940,
as amended (the "1940 Act"). There can be no assurance that the Fund
will
achieve its investment objective.
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.
17
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
The Fund may borrow money (up to 25% of its total assets) to
increase its
investments, thereby leveraging its portfolio and exaggerating the
effect on net
asset value of any increase or decrease in the market value of the
Fund's
securities. See "Leverage through Borrowing." The Fund may enter into
repurchase
agreements, reverse repurchase agreements and firm commitment
agreements and
"short sales against the box" and may lend its portfolio securities.
The total
of the Fund's direct borrowing and borrowings in connection with
entering into
reverse repurchase agreements will not exceed 33 1/3% of the Fund's
total
assets. Except when in a temporary defensive investment position, the
Fund
intends to maintain at least 65% of its assets invested in U.S.
government
securities (including futures contracts and options thereon and options
relating
to U.S. government securities).
The Fund's distributions may consist of interest income from U.S.
government
securities, premiums from expired put and call options written by the
Fund, net
gains from closing purchase and sale transactions in options, futures
contracts
or related options, and net gains from sales of portfolio securities
pursuant to
options or otherwise. The investments of the Fund involve certain
special risks
set forth in the description of those techniques in this Prospectus and
in the
Statement of Additional Information.
The value of securities in which the Fund invests (and therefore the
Fund's
net asset value per share) generally will vary inversely with changes
in
interest rates and also will fluctuate in response to other factors.
In making purchases of securities consistent with the above
policies, the
Fund will be subject to the applicable restrictions referred to under
"Investment Restrictions" in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions on U.S. government securities with banks which are the
issuers of
instruments acceptable for purchase by the Fund and with certain
dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of
a typical repurchase agreement, the Fund would acquire an underlying
debt
obligation for a relatively short period (usually not more than one
week),
subject to an obligation of the seller to repurchase, and the Fund to
resell,
the obligation at an agreed-upon price and time, thereby determining
the yield
during the Fund's holding period. This arrangement results in a fixed
rate of
return that is not subject to market fluctuations during the Fund's
holding
period. The value of the underlying securities will be at least equal
at all
times to the total amount of the 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
18
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
risk of incurring expenses associated with asserting those rights and
the risk
of losing all or part of the income from the agreement. MMC, acting
under the
supervision of the Board of Directors, reviews on an ongoing basis the
creditworthiness and the value of the collateral of those banks and
dealers with
which the Fund enters into repurchase agreements to evaluate potential
risks.
Reverse Repurchase Agreements. A reverse repurchase agreement
involves the
sale of a money market instrument by the Fund and its agreement to
repurchase
the instrument at a specified time and price. The Fund will maintain a
segregated account consisting of U.S. government securities or cash or
cash
equivalents to cover its obligations under reverse repurchase
agreements with
broker-dealers (but not banks). The Fund will invest the proceeds in
other money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. Under the 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 earned 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.
19
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
Firm Commitment Agreements and When-Issued Purchases. Firm
commitment
agreements and when-issued purchases call for the purchase of
securities at an
agreed-upon price on a specified future date, and would be used, for
example,
when a decline in the yield of securities of a given issuer is
anticipated. The
Fund as purchaser assumes the risk of any decline in value of the
security
beginning on the date of the agreement or purchase. The Fund will not
use such
transactions for leveraging purposes, and accordingly will segregate
U.S.
government securities, cash or cash equivalents in an amount sufficient
to meet
its purchase obligations under the agreement.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund is authorized to lend securities it holds to
brokers,
dealers and other financial organizations 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. 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 MMC to be in good standing and will not be made unless, in
the
judgement of MMC, the considerations 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.
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
20
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Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
written by the Fund on which it wishes to terminate its obligation.
The Fund also may write and purchase put options ("puts"). When the
Fund
writes a put, it receives a premium and gives the purchaser of the put
the right
to sell the underlying security to the Fund at the exercise price at
any time
during the option period. When the Fund purchases a put, it pays a
premium in
return for the right to sell the underlying security at the exercise
price at
any time during the option period. If any put is not exercised or sold,
it will
become worthless on its expiration date. The Fund will not purchase
puts on
securities if more than 10% of its net assets would be invested in
premiums on
puts.
The Fund may write puts on securities only if they are "secured." A
put is
"secured" if the Fund maintains cash, cash equivalents or U.S.
government
securities with a value equal to the exercise price in a segregated
account or
holds a put on the same underlying security at an equal or greater
exercise
price. The aggregate value of the obligations underlying puts written
by the
Fund will not exceed 50% of its net assets. The Fund also writes
"straddles,"
which are combinations of secured puts and covered calls on the same
underlying
security.
The Fund will realize a gain (or loss) on a closing purchase
transaction with
respect to a call or put previously written by the Fund if the premium,
plus
commission costs, paid to purchase the call or put is less (or greater)
than the
premium, less commission costs, received on the sale of the call or
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
21
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Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
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 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
MMC 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 MMC
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
22
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Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
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 limitation on the amount of
assets
committed to margin and option premiums.
The Fund will not engage in transactions involving futures contracts
or
related options for speculation but only as a hedge against changes in
the
market values of debt securities held, or intended to be purchased, by
the Fund
and where the transactions are appropriate to reduction of the Fund's
risks. The
Fund's futures transactions will be entered into for traditional
hedging
purposes -- that is, futures contracts will be sold (or related put
options
purchased) to protect against a decline in the price of securities that
the Fund
owns, or futures contracts (or related call options) will be purchased
to
protect the Fund against an increase in the price of securities it is
committed
to purchase.
There is no assurance that the Fund will be able to close out its
futures
positions at any time, in which case it would be required to maintain
the margin
deposits on the contract. There can be no assurance that hedging
transactions
will be successful, 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
23
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- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
such coverage, if it should decline to less than 300% due to market
fluctuations
or otherwise, even if it is disadvantageous from an investment
standpoint.
Leveraging will exaggerate the effect of any increase or decrease in
the value
of portfolio securities on the Fund's net asset value, and money
borrowed will
be subject to interest costs (which may include commitment fees and/or
the cost
of maintaining minimum average balances) which may or may not exceed
the
interest and option premiums received from the securities purchased
with
borrowed funds.
American Depositary Receipts. The Fund may purchase foreign
securities and
American Depositary Receipts ("ADRs"), which are dollar-denominated
receipts
issued generally by domestic banks and representing the deposit with
the bank of
a security of a foreign issuer. ADRs are publicly traded on exchanges
or
over-the-counter in the United States.
Year 2000. The investment management services provided to the Fund
by MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer
software systems in use today cannot recognize the year 2000, but
revert to 1900
or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the Fund's
operations,
including the handling of securities trades, pricing and account
services. MMC
and Smith Barney have advised the Fund that they have been reviewing
all of
their computer systems and actively working on necessary changes to
their
systems to prepare for the year 2000 and expect that their systems will
be
compliant before that date. In addition, MMC has been advised by the
Fund's
custodian, transfer agent and accounting service agent that they are
also in the
process of modifying their systems with the same goal. There can,
however, be no
assurance that MMC, Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer
systems will
not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
The Fund may experience high portfolio turnover as a result of its
investment
strategies. Short-term gains realized from portfolio transactions are
taxable to
shareholders as ordinary income. While the Fund does not intend to
engage in
short-term trading, it will not consider portfolio turnover rate a
limiting
factor in making investment decisions consistent with its respective
objectives
and policies.
24
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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 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.
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- ---------
Dividends, Distributions and Taxes
- -----------------------------------------------------------------------
- ---------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to declare and pay monthly dividends from its
net
investment income. Dividends from net realized capital gains, if any,
will be
distributed annually. The Fund may also pay additional dividends
shortly before
December 31 from certain amounts of undistributed ordinary income and
capital
gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain
distributions will be automatically reinvested in additional same Class
shares
at the appropriate net asset value, with
25
<PAGE>
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- ---------
Dividends, Distributions and Taxes (continued)
- -----------------------------------------------------------------------
- ---------
no additional sales charge or CDSC.
The per share amounts of dividends from net investment income on
Classes B
and C may be lower than that of Classes A and Y, mainly as a result of
the
distribution fees applicable to Class B and C shares. Similarly, the
per share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
TAXES
The following is a summary of the material federal tax
considerations
affecting the Fund and Fund shareholders. Please refer to the SAI for
further
discussion. In addition to the considerations described below and in
the SAI,
there may be other federal, state, local, and/or foreign tax
applications to
consider. Because taxes are a complex matter, prospective shareholders
are urged
to consult their tax advisors for more detailed information with
respect to the
tax consequences of any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, so
long as
such qualification is in the best interests of its shareholders, the
Fund will
pay no federal income tax on its net investment company taxable income
and
long-term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-
term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains,
derived
from the sale of securities held by the Fund for more than one year,
are taxable
as long-term capital gains, regardless of the length of time a
shareholder has
owned Fund shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
dividends received deduction. Dividends consisting of interest from
U.S.
government securities may be exempt from state and local income taxes.
The Fund
will inform shareholders of the source and tax status of all
distributions
promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of
Fund shares
owned for six months or less will be treated as a long-term capital
loss to the
extent a capital gain dividend had been distributed on such shares.
26
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Dividends, Distributions and Taxes (continued)
- -----------------------------------------------------------------------
- ---------
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer
identification
number (social security or employer identification number). Withholding
from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax
withheld
as a result of backup withholding does not constitute an additional
tax, and may
be claimed as a credit on the shareholders' federal income tax return.
- -----------------------------------------------------------------------
- ---------
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 $15,000,000 (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 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 $15,000,000.
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
27
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Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 or other funds affiliated with Travelers 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 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.
28
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Purchase of Shares (continued)
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- ---------
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 Price of 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.
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 or other Travelers-affiliated 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
29
<PAGE>
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- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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; (h) purchases by investors
participating in a Smith Barney fee-based arrangement; and (i)
purchases of
Class A shares by Section 403(b) or Section 401(a) or (k) accounts
associated
with Copeland Retirement Programs. 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.
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
30
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 all Class A shares of the Fund and other funds of the
Smith Barney
Mutual Funds offered with a sales charge over the 13 month period based
on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the
13 month
period starting up to 90 days before the date of execution of a Letter
of
Intent. Each investment made during the period receives the reduced
sales charge
applicable to the total amount of the investment goal. If the goal is
not
achieved within the period, the investor must pay the difference
between the
sales charges applicable to the purchases made and the charges
previously paid,
or an appropriate number of escrowed shares will be redeemed. Please
contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent
application.
31
<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 $5,000,000 in Class Y shares of the
Fund and
agree to purchase a total of $15,000,000 of Class Y shares of the same
Fund
within thirteen months from the date of the Letter. If a total
investment of
$15,000,000 is not made within the thirteen-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
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
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."
32
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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.
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
33
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 591/2; (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.
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.
34
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
(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 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.
35
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
591/2 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.
36
<PAGE>
- -----------------------------------------------------------------------
- ---------
Exchange Privilege (continued)
- -----------------------------------------------------------------------
- ---------
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend 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
Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
37
<PAGE>
- -----------------------------------------------------------------------
- ---------
Exchange Privilege (continued)
- -----------------------------------------------------------------------
- ---------
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global 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.
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.
38
<PAGE>
- -----------------------------------------------------------------------
- ---------
Exchange Privilege (continued)
- -----------------------------------------------------------------------
- ---------
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. MMC 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 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
39
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
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 $10,000 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 $10,000 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
40
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 4:00
p.m. (New
York City time) on any day the NYSE is open. Redemption requests
received after
the close of regular trading on the NYSE are priced at the net asset
value next
determined. Redemptions of shares (i) by retirement plans or (ii) for
which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated
by the
shareholder. Generally, redemption proceeds will be mailed or wired, as
the case
may be, on the next business day following the redemption request. In
order to
use the wire procedures, the bank receiving the proceeds must be a
member of the
Federal Reserve System or have a correspondent relationship with a
member bank.
The Fund reserves the right to charge shareholders a nominal fee for
each wire
redemption. Such charges, if any, will be assessed against the
shareholder's
account from which shares were redeemed. In order to change the bank
account
designated to receive redemption proceeds, a shareholder must complete
a new
Telephone/Wire Authorization Form and, for the protection of the
shareholder's
assets, will be required to provide a signature guarantee and certain
other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if
the
account registration of the shares of the fund being acquired is
identical to
the registration of the shares of the fund exchanged. Such exchange
requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and
4:00 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
41
<PAGE>
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- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
(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
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
42
<PAGE>
- -----------------------------------------------------------------------
- ---------
Performance (continued)
- -----------------------------------------------------------------------
- ---------
Class Y shares of the Fund. These figures are based on historical
earnings and
are not intended to indicate future performance. Total return is
computed for a
specified period of time assuming deduction of the maximum sales
charge, if any,
from the initial amount invested and reinvestment of all income
dividends and
capital gains distributions on the reinvestment dates at prices
calculated as
stated in this Prospectus, then dividing the value of the investment at
the end
of the period so calculated by the initial amount invested and
subtracting 100%.
The standard average annual total return, as prescribed by the SEC, is
derived
from this total return which provides the ending redeemable value. Such
standard
total return information may also be accompanied with nonstandard total
return
information for differing periods computed in the same manner but
without
annualizing the total return or taking sales charges into account. The
Fund
calculates current dividend return for each Class by annualizing the
most recent
monthly distribution and dividing by the net asset value or the maximum
public
offering price (including sales charge) on the last day of the period
for which
current dividend return is presented. The current dividend return for
each Class
may vary from time to time depending on market conditions, the
composition of
its investment portfolio and operating expenses. These factors and
possible
differences in the methods used in calculating current dividend return
should be
considered when comparing a Class' current return to yields published
for other
investment companies and other investment vehicles. The Fund may also
include
comparative performance information in advertising or marketing its
shares. Such
performance information may include data from Lipper Analytical
Services, Inc.
or similar independent services that monitor the performance of mutual
funds, or
other industry publications.
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund
- -----------------------------------------------------------------------
- ---------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Company
rests
with the Company's Board of Directors. The Directors approve all
significant
agreements between the Company and the companies that furnish services
to the
Company and the Fund, including agreements with the Fund's distributor,
investment adviser, administrator, custodian and transfer agent. The
day-to-day
operations of the Fund are delegated to the Fund's investment adviser
and
administrator. The SAI contains background information regarding each
Director
and executive officer of the Company.
INVESTMENT ADVISER -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013,
serves as the
Fund's investment adviser. MMC (through predecessor entities) has been
in the
investment counseling business since 1940. MMC renders
43
<PAGE>
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund (continued)
- -----------------------------------------------------------------------
- ---------
investment advice to investment companies which had aggregate assets
under
management as of March 31, 1998 of approximately $100.5 billion.
Subject to the supervision and direction of the Company's Board of
Directors,
MMC 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 MMC 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, 1997, MMC
was paid
investment advisory fees equal to 0.35% of the value of the Fund's
average daily
net assets.
PORTFOLIO MANAGEMENT
James E. Conroy, Managing Director of Smith Barney, 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, 1997 is
included in
the Fund's Annual Report dated December 31, 1997. 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 -- MMC
MMC also serves as the Fund's administrator and oversees all aspects
of the
Fund's administration. For administration services rendered, the Fund
pays the
MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily
net assets.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also subject
to approval by the stockholders of each of Travelers Group and
Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank
holding
company subject to regulation under the Bank Holding Company Act of
1956 (the
"BCHA"), the requirements of the Glass-Steagall Act and certain other
laws and
regulations. Although the effects of the merger of Travelers and
Citicorp and
compliance with the requirements of the BCHA and the Glass-Steagall Act
are
44
<PAGE>
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund (continued)
- -----------------------------------------------------------------------
- ---------
still under review, Salomon Brothers Asset Management does not believe
that its
compliance with applicable law following the merger of Travelers and
Citicorp
will have a material adverse effect on its ability to continue to
provide the
Fund with the same level of investment advisory services that it
currently
receives.
- -----------------------------------------------------------------------
- ---------
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.
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.
45
<PAGE>
- -----------------------------------------------------------------------
- ---------
Additional Information (continued)
- -----------------------------------------------------------------------
- ---------
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 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.
46
<PAGE>
SMITH BARNEY
---
- ---------
A Member of
TravelersGroup[Logo]
Smith Barney
Government
Securities
Fund
388
Greenwich Street
New York, New
York 10013
FD
0234 4/98
PROSPECTUS
SMITH BARNEY
Investment
Grade
Bond
Fund
April
30, 1998
Prospectus begins on
page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- -----------------------------------------------------------------------
- ---------
Prospectus April
30, 1998
- -----------------------------------------------------------------------
- ---------
Smith Barney Investment Grade Bond Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
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 (the "SAI") dated April 30, 1998,
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
SAI 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
Mutual Management Corp.
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
- -----------------------------------------------------------------------
- ---------
Prospectus Summary
3
- -----------------------------------------------------------------------
- ---------
Financial Highlights
11
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- ---------
Investment Objective and Management Policies
16
- -----------------------------------------------------------------------
- ---------
Valuation of Shares
22
- -----------------------------------------------------------------------
- ---------
Dividends, Distributions and Taxes
23
- -----------------------------------------------------------------------
- ---------
Purchase of Shares
25
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- ---------
Exchange Privilege
34
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- ---------
Redemption of Shares
37
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- ---------
Minimum Account Size
40
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- ---------
Performance
40
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- ---------
Management of the Company and the Fund
41
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- ---------
Distributor
42
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- ---------
Additional Information
43
- -----------------------------------------------------------------------
- ---------
- -----------------------------------------------------------------------
- ---------
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 SAI. 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 $15,000,000.
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>
- -----------------------------------------------------------------------
- ---------
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 $15,000,000. 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>
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- ---------
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 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
Retirement
Plan. Investors in Class Y shares may open an account for an initial
5
<PAGE>
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- ---------
Prospectus Summary (continued)
- -----------------------------------------------------------------------
- ---------
investment of $15,000,000. 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 Mutual Management Corp. ("MMC") (formerly known
as Smith
Barney Mutual Funds Management Inc.), serves as the Fund's investment
adviser
and administrator. MMC provides investment advisory and management
services to
investment companies affiliated with Smith Barney. MMC is a wholly
owned
subsidiary of Salomon 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, including
Asset
Management, 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. Distributions of net realized long- and short-term capital
gains, if
any, are declared and paid at least 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 0.12 0.11
0.14 0.04
- -----------------------------------------------------------------------
- ----------------
TOTAL FUND OPERATING EXPENSES 1.02% 1.51%
1.49% 0.69%
=======================================================================
================
</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 $76 $99
$165
Class B 60 78 92
167
Class C 25 47 81
178
Class Y 7 22 38
86
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A 55 76 99
165
Class B 15 48 82
167
Class C 15 47 81
178
Class Y 7 22 38
86
- -----------------------------------------------------------------------
- ---------
* 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
representative 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 three-year period ended December
31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report
thereon appears in the Fund's Annual Report dated December 31, 1997.
The
following information for the fiscal years ended December 31, 1988
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 SAI.
For a Class A share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1997 1996 1995(1)
1994(1) 1993(1) 1992(2)
=======================================================================
===================================
<S> <C> <C> <C>
<C> <C> <C>
Net Asset Value, Beginning of Year $12.27 $13.25 $10.67
$13.01 $11.89 $11.67
- -----------------------------------------------------------------------
- -----------------------------------
Income (Loss) From Operations:
Net investment income 0.80 0.80 0.83
0.74 0.88 0.14
Net realized and unrealized gain (loss) 1.20 (0.90) 2.80
(1.88) 1.27 0.23
- -----------------------------------------------------------------------
- -----------------------------------
Total Income (Loss) From Operations 2.00 (0.10) 3.63
(1.14) 2.15 0.37
- -----------------------------------------------------------------------
- -----------------------------------
Less Distributions From:
Net investment income (0.80) (0.76) (0.89)
(0.86) (0.89) (0.14)
Net realized gains (0.28) (0.12) (0.16)
(0.31) (0.14) --
Capital -- -- --
(0.03) -- (0.01)
- -----------------------------------------------------------------------
- -----------------------------------
Total Distributions (1.08) (0.88) (1.05)
(1.20) (1.03) (0.15)
- -----------------------------------------------------------------------
- -----------------------------------
Net Asset Value, End of Year $13.19 $12.27 $13.25
$10.67 $13.01 $11.89
- -----------------------------------------------------------------------
- -----------------------------------
Total Return 17.10% (0.47)% 35.29%
(8.95)% 18.45% 3.25%++
- -----------------------------------------------------------------------
- -----------------------------------
Net Assets, End of Year (millions) $ 222 $ 206 $ 226
$ 181 $ 10 $ 1
- -----------------------------------------------------------------------
- -----------------------------------
Ratios to Average Net Assets:
Expenses 1.02% 1.04% 1.11%
1.11% 1.11% 1.03%+*
Net investment income 6.43 6.63 7.02
7.35 6.67 7.53+
- -----------------------------------------------------------------------
- -----------------------------------
Portfolio Turnover Rate 39% 48% 49%
18% 65% 47%
=======================================================================
===================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method rather than the undistributed net investment income
method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to December
31,
1992.
* 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.
11
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a Class B share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1997 1996 1995(1) 1994(1)
1993(1) 1992 1991 1990 1989 1988
=======================================================================
=======================================================
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.29 $13.25 $10.67 $13.01
$11.89 $11.80 $10.43 $11.01 $10.33 $10.55
- -----------------------------------------------------------------------
- -------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.74 0.77 0.82
0.80 0.83 0.86 0.86 0.87*** 0.90***
Net realized and unrealized
gain (loss) 1.18 (0.90) 2.80 (2.02)
1.29 0.12 1.38 (0.57) 0.68 (0.24)
- -----------------------------------------------------------------------
- -------------------------------------------------------
Total Income (Loss) From Operations 1.93 (0.16) 3.57 (1.20)
2.09 0.95 2.24 0.29 1.55 0.66
- -----------------------------------------------------------------------
- -------------------------------------------------------
Less Distributions From:
Net investment income (0.75) (0.68) (0.83) (0.80)
(0.83) (0.83) (0.87) (0.87) (0.87) (0.88)
Net realized gains (0.28) (0.12) (0.16) (0.31)
(0.14) -- -- -- -- --
Capital -- -- .-- (0.03)
.-- (0.03) -- -- -- .--
- -----------------------------------------------------------------------
- -------------------------------------------------------
Total Distributions (1.03) (0.80) (0.99) (1.14)
(0.97) (0.86) (0.87) (0.87) (0.87) (0.88)
- -----------------------------------------------------------------------
- -------------------------------------------------------
Net Asset Value, End of Year $13.19 $12.29 $13.25 $10.67
$13.01 $11.89 $11.80 $10.43 $11.01 $10.33
- -----------------------------------------------------------------------
- -------------------------------------------------------
Total Return 16.44% (0.89)% 34.63% (9.41)%
18.06% 8.36% 22.50% 2.98% 15.57% 6.43%
- -----------------------------------------------------------------------
- -------------------------------------------------------
Net Assets, End of Year (millions) $ 249 $ 258 $ 289 $ 221
$ 476 $ 432 $ 414 $ 406 $ 483 $ 533
- -----------------------------------------------------------------------
- -------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.51% 1.54% 1.61% 1.57%
1.58% 1.57%* 1.53% 1.58% 1.63%** 1.22%**
Net investment income 5.95 6.13 6.51 6.89
6.20 6.99 7.90 8.20 8.07 8.74
- -----------------------------------------------------------------------
- -------------------------------------------------------
Portfolio Turnover Rate 39% 48% 49% 18%
65% 47% 82% 59% 118% 72%
=======================================================================
=======================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method rather than the undistributed net investment income
method, because
it more accurately reflects the per share data for the period.
* 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.
12 & 13
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a Class C share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Investment Grade Bond Fund 1997 1996 1995(1)
1994(1) 1993(1)(2)
=======================================================================
=====================
<S> <C> <C> <C>
<C> <C>
Net Asset Value, Beginning of Year $12.30 $13.26 $10.67
$13.01 $12.56
- -----------------------------------------------------------------------
- ---------------------
Income (Loss) From Operations:
Net investment income 0.72 0.75 0.78
0.75 0.63
Net realized and unrealized gain (loss) 1.21 (0.90) 2.80
(1.95) 0.65
- -----------------------------------------------------------------------
- ---------------------
Total Income (Loss) From Operations 1.93 (0.15) 3.58
(1.20) 1.28
- -----------------------------------------------------------------------
- ---------------------
Less Distributions From:
Net investment income (0.77) (0.69) (0.83)
(0.80) (0.69)
Net realized gains (0.28) (0.12) (0.16)
(0.31) (0.14)
Capital -- -- --
(0.03) --
- -----------------------------------------------------------------------
- ---------------------
Total Distributions (1.05) (0.81) (0.99)
(1.14) (0.83)
- -----------------------------------------------------------------------
- ---------------------
Net Asset Value, End of Year $13.18 $12.30 $13.26
$10.67 $13.01
- -----------------------------------------------------------------------
- ---------------------
Total Return 16.41% (0.83)% 34.74%
(9.41)% 10.38%++
- -----------------------------------------------------------------------
- ---------------------
Net Assets, End of Year (millions) $ 10 $ 7 $ 4
$ 1 $ 2
Ratios to Average Net Assets:
Expenses 1.49% 1.42% 1.56%
1.57% 1.61%+
Net investment income 5.93 6.28 6.55
6.89 6.17+
- -----------------------------------------------------------------------
- ---------------------
Portfolio Turnover Rate 39% 48% 49%
18% 65%
=======================================================================
=====================
</TABLE>
(1) Per share amounts have been calculated using the monthly average
shares
method, rather than the undistributed net investment income
method,
because it more accurately reflects the per share data for the
period.
(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.
14
<PAGE>
- -----------------------------------------------------------------------
- ---------
Financial Highlights (continued)
- -----------------------------------------------------------------------
- ---------
For a Class Y share of capital stock outstanding throughout each year:
Investment Grade Bond Fund 1997
1996(1)
=======================================================================
=======
Net Asset Value, Beginning of Year $12.28
$13.03
- -----------------------------------------------------------------------
- -------
Income From Operations:
Net investment income 0.83
0.75
Net realized and unrealized gain (loss) 1.21
(0.66)
- -----------------------------------------------------------------------
- -------
Total Income From Operations 2.04
0.09
- -----------------------------------------------------------------------
- -------
Less Distributions From:
Net investment income (0.85)
(0.72)
Net realized gains (0.28)
(0.12)
- -----------------------------------------------------------------------
- -------
Total Distributions (1.13)
(0.84)
- -----------------------------------------------------------------------
- -------
Net Asset Value, End of Year $13.19
$12.28
- -----------------------------------------------------------------------
- -------
Total Return 17.44%
1.01%++
- -----------------------------------------------------------------------
- -------
Net Assets, End of Year (millions) $ 69
$ 18
- -----------------------------------------------------------------------
- -------
Ratios to Average Net Assets:
Expenses 0.69%
0.72%+
Net investment income 6.63
7.34+
- -----------------------------------------------------------------------
- -------
Portfolio Turnover Rate 39%
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 SAI. 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 SAI.
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's investment objective may not be changed without the
approval
of a majority of the Fund's outstanding shares. 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 by a nationally recognized statistical rating
organization
("NRSRO") within one of the four highest rating categories of their
class. The
Fund will invest primarily in the following securities: corporate bonds
rated in
the highest four categories for debt securities by an NRSRO (such as
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 in the top
two
ratings categories for short-term debt securities by an NRSRO (such as
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 in the highest two
categories
for debt securities by an NRSRO (such as 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 (such as Baa by Moody's
or BBB
by S&P) may have speculative characteristics and changes in economic
conditions
or other circumstances are more likely to lead to a weakened capacity
to make
principal and interest payments, including a greater possibility of
default or
bankruptcy of the issuer, than is the case with higher grade bonds.
Subsequent
to its purchase by the Fund, an issue of securities may cease to be
rated or its
rating may be reduced below the minimum required for purchase by the
Fund. In
addition, it is possible that Moody's, S&P and other NRSROs 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 MMC
will consider these events in determining whether the Fund should
continue to
hold the securities.
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, MMC analyzes the business and credit qualities of a
particular issuer
as well as the
16
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
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 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 SAI.
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;
17
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
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 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
18
<PAGE>
- -----------------------------------------------------------------------
- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
of incurring expenses associated with asserting those rights and the
risk of
losing all or part of the income from the agreement. MMC, 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 byMMC 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 331/3% 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. Consistent with applicable regulatory
requirements, the Fund may lend securities it holds to brokers, dealers
and
other financial organizations 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; and (c) the
Fund will
receive any interest or dividends paid on the loaned securities. 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
MMC to be
in good standing and will not be made unless, in the judgement of MMC,
the
consideration to be earned from such loans would justify the risk.
19
<PAGE>
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- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
Interest Rate Futures Contracts. The Fund may purchase and sell
interest rate
futures contracts ("futures contracts") as a hedge against changes in
interest
rates. A futures contract is an agreement between two parties to buy
and sell a
security for a set price on a future date. Futures contracts are traded
on
designated "contracts markets" which, through their clearing
corporations,
guarantee performance of the contracts. Currently, there are futures
contracts
based on securities such as long-term Treasury bonds, Treasury notes,
GNMA
Certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of
outstanding debt
securities declines (and vice versa). Entering into a futures contract
for the
sale of securities has an effect similar to the actual sale of
securities,
although the sale of the futures contract might be accomplished more
easily and
quickly. For example, if the Fund holds long-term U.S. government
securities and
MMC 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 MMC
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.
20
<PAGE>
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- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
The Fund may not purchase futures contracts or related options if,
immediately thereafter, more than 30% of the Fund's total assets would
be so
invested. In purchasing and selling futures contracts and related
options, the
Fund will comply with rules and interpretations of the Commodity
Futures Trading
Commission ("CFTC"), under which the Company is excluded from
regulation as a
"commodity pool." CFTC regulations permit use of commodity futures and
options
for bona fide hedging purposes without limitations on the amount of
assets
committed to margin and option premiums.
The Fund will not engage in transactions involving futures contracts
or
related options for speculation but only as a hedge against changes in
the
market values of debt securities held, or intended to be purchased, by
the Fund
and where the transactions are appropriate to reduction of the Fund's
risks. The
Fund's futures transactions will be entered into for traditional
hedging
purposes -- that is, futures contracts will be sold (or related put
options
purchased) to protect against a decline in the price of securities that
the Fund
owns, or futures contracts (or related call options) will be purchased
to
protect the Fund against an increase in the price of securities it is
committed
to purchase.
There is no assurance that the Fund will be able to close out its
futures
positions at any time, in which case it would be required to maintain
the margin
deposits on the contract. There can be no assurance that hedging
transactions
will be successful, 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.
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.
21
<PAGE>
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- ---------
Investment Objective and Management Policies (continued)
- -----------------------------------------------------------------------
- ---------
Year 2000. The investment management services provided to the Fund
by MMC and
the services provided to shareholders by Smith Barney, the Fund's
Distributor,
depend on the smooth functioning of their computer systems. Many
computer
software systems in use today cannot recognize the year 2000, but
revert to 1900
or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the Fund's
operations,
including the handling of securities trades, pricing and account
services. MMC
and Smith Barney have advised the Fund that they have been reviewing
all of
their computer systems and actively working on necessary changes to
their
systems to prepare for the year 2000 and expect that their systems will
be
compliant before that date. In addition, MMC has been advised by the
Fund's
custodian, transfer agent and accounting service agent that they are
also in the
process of modifying their systems with the same goal. There can,
however, be no
assurance that MMC, Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer
systems will
not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
MMC 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. MMC 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.
A security that is primarily traded on a United States or foreign
stock
exchange
22
<PAGE>
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- ---------
Valuation of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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's policy is to declare and pay monthly dividends from its
net
investment income. Dividends from net realized capital gains, if any,
will be
distributed annually. The Fund may also pay additional dividends
shortly before
December 31 from certain amounts of undistributed ordinary income and
capital
gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain
distributions will be automatically reinvested in additional same Class
shares
at the appropriate net asset value, with no additional sales charge or
CDSC.
The per share amounts of dividends from net investment income on
Classes B
and C may be lower than that of Classes A and Y, mainly as a result of
the
distribution fees applicable to Class B and C shares. Similarly, the
per share
amounts of dividends from net investment income on Class A shares may
be lower
than that of Class Y, as a result of the service fee attributable to
Class A
shares. Capital gain distributions, if any, will be the same amount
across all
Classes of Fund shares (A, B, C and Y).
23
<PAGE>
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- ---------
Dividends, Distributions and Taxes (continued)
- -----------------------------------------------------------------------
- ---------
TAXES
The following is a summary of the material federal tax
considerations
affecting the Fund and Fund shareholders. Please refer to the SAI for
further
discussion. In addition to the considerations described below and in
the SAI,
there may be other federal, state, local, and/or foreign tax
applications to
consider. Because taxes are a complex matter, prospective shareholders
are urged
to consult their tax advisors for more detailed information with
respect to the
tax consequences of any investment.
The Fund intends to qualify, as it has in prior years, under
Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, so
long as
such qualification is in the best interests of its shareholders, the
Fund will
pay no federal income tax on its net investment company taxable income
and
long-term capital gain that is distributed to shareholders.
Dividends paid from net investment income and net realized short-
term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains,
derived
from the sale of securities held by the Fund for more than one year,
are taxable
as long-term capital gains, regardless of the length of time a
shareholder has
owned Fund shares.
Shareholders are required to pay tax on all taxable distributions,
even if
those distributions are automatically reinvested in additional Fund
shares. A
portion of the dividends paid by the Fund may qualify for the corporate
dividends received deduction. Dividends consisting of interest from
U.S.
government securities may be exempt from state and local income taxes.
The Fund
will inform shareholders of the source and tax status of all
distributions
promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares
(whether by
redemption, sale or exchange), generally will be a long-term or short-
term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of
Fund shares
owned for six months or less will be treated as a long-term capital
loss to the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all
taxable
dividends, capital gain distributions, and the proceeds of any
redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer
identification
number (social security or employer identification number). Withholding
from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax
withheld
as a result of backup withholding does not constitute an additional
tax, and may
be claimed as a credit on the shareholders' federal income tax return.
24
<PAGE>
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- ---------
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 $15,000,000 (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 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 $15,000,000.
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 or other funds affiliated with Travelers 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.
25
<PAGE>
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- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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.
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:
Sales Sales
Dealer's
Charge as % Charge as % of
Reallowance as %
Amount of Investment of Offering Price 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."
26
<PAGE>
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- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
Members of the selling group may receive up to 90% of the sales
charge and
may be deemed to be underwriters of the Fund as defined in the
Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of
purchases of
Class A shares of the Fund made at one time by "any person," which
includes an
individual 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 or other Travelers affiliated 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;
(h)
purchases by investors participating in a Smith Barney fee-based
arrangement;
and (i) purchases of Class A shares by of Section 403(b) or Section
401(a) or
(k) accounts associated with Copeland Retirement Programs. In order to
obtain
such discounts, the purchaser must provide sufficient information
27
<PAGE>
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- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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.
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
28
<PAGE>
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- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
of the Fund and the members, and must agree to include sales and other
materials
related to the Fund in its publications and mailings to members at no
cost to
Smith Barney. In order to obtain such reduced sales charge or to
purchase at net
asset value, the purchaser must provide sufficient information at the
time of
purchase to permit verification that the purchase qualifies for the
reduced
sales charge. Approval of group purchase reduced sales charge plans is
subject
to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more
provides an
opportunity for an investor to obtain a reduced sales charge by
aggregating
investments over a 13 month period, provided that the investor refers
to such
Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the
Smith Barney
Mutual Funds offered with a sales charge over the 13 month period based
on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the
13 month
period starting up to 90 days before the date of execution of a Letter
of
Intent. Each investment made during the period receives the reduced
sales charge
applicable to the total amount of the investment goal. If the goal is
not
achieved within the period, the investor must pay the difference
between the
sale charges applicable to the purchases made and the charges
previously paid,
or an appropriate number of escrowed shares will be redeemed. Please
contact a
Smith Barney Financial Consultant or 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 $5,000,000 in Class Y shares of the
Fund and
agree to purchase a total of $15,000,000 of Class Y shares of the same
Fund
within thirteen months from the date of the Letter. If a total
investment of
$15,000,000 is not made within the thirteen-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
29
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
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
30
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
funds. For Federal income tax purposes, the amount of the CDSC will
reduce
the gain or increase the loss, as the case may be, on the amount
realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B
shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional
shares through dividend reinvestment. During the fifteenth month after
the
purchase, the investor decided to redeem $500 of his or her investment.
Assuming
at the time of the redemption the net asset value had appreciated to
$12 per
share, the value of the investor's shares would be $1,260 (105 shares
at $12 per
share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares
($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be
charged at a rate of 4.00% (the applicable rate for Class B shares) for
a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month of
the value of the shareholder's shares at the time the withdrawal plan
commences
(see "Automatic Cash Withdrawal Plan" (provided, however, that
automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the
value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares
within 12
months following the death or disability of the shareholder; (d)
redemption of
shares, made in connection with qualified distributions from retirement
plans or
IRAs upon the attainment of age 591/2; (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
invest-
31
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
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
32
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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, 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.
33
<PAGE>
- -----------------------------------------------------------------------
- ---------
Purchase of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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
591/2 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. 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
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
34
<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
Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global--International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global 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
35
<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. MMC 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, MMC 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
36
<PAGE>
- -----------------------------------------------------------------------
- ---------
Exchange Privilege (continued)
- -----------------------------------------------------------------------
- ---------
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.
- -----------------------------------------------------------------------
- ---------
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, 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
37
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 $10,000, 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 $10,000 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.
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
38
<PAGE>
- -----------------------------------------------------------------------
- ---------
Redemption of Shares (continued)
- -----------------------------------------------------------------------
- ---------
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 4:00
p.m. (New
York City time) on any day the NYSE is open. Redemption requests
received after
the close of regular trading on the NYSE are priced at the net asset
value next
determined. Redemptions of shares (i) by retirement plans or (ii) for
which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated
by the
shareholder. Generally, redemption proceeds will be mailed or wired, as
the case
may be, on the next business day following the redemption request. In
order to
use the wire procedures, the bank receiving the proceeds must be a
member of the
Federal Reserve System or have a correspondent relationship with a
member bank.
The Fund reserves the right to charge shareholders a nominal fee for
each wire
redemption. Such charges, if any, will be assessed against the
shareholder's
account from which shares were redeemed. In order to change the bank
account
designated to receive redemption proceeds, a shareholder must complete
a new
Telephone/ Wire Authorization Form and, for the protection of the
shareholder's
assets, will be required to provide a signature guarantee and certain
other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if
the
account registration of the shares of the fund being acquired is
identical to
the registration of the shares of the fund exchanged. Such exchange
requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and
4:00 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.
39
<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 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
40
<PAGE>
- -----------------------------------------------------------------------
- ---------
Performance (continued)
- -----------------------------------------------------------------------
- ---------
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 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 SAI
contains general and background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013,
serves as the
Fund's investment adviser. MMC (through predecessor entities) has been
in the
investment counseling business since 1940. MMC renders investment
advice to
investment companies that had aggregate assets under management as of
March 31,
1998 of approximately $100.5 billion.
Subject to the supervision and direction of the Fund's Board of
Directors,
MMC 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 MMC 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, 1997, MMC 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.
41
<PAGE>
- -----------------------------------------------------------------------
- ---------
Management of the Company and the Fund (continued)
- -----------------------------------------------------------------------
- ---------
Management's discussion and analysis and additional performance
information
regarding the Fund during the fiscal year ended December 31, 1997 is
included in
the Annual Report dated December 31, 1997. 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.
ADMINISTRATOR -- MMC
MMC 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 up to $500 million and 0.18% of the
average
daily net assets thereafter.
On April 6, 1998, Travelers announced that it had entered into a
Merger
Agreement with Citicorp. The transaction, which is expected to be
completed
during the third quarter of 1998, is subject to various regulatory
approvals,
including approval by the Federal Reserve Board. The transaction is
also subject
to approval by the stockholders of each of Travelers Group and
Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank
holding
company subject to regulation under the Holding Company Act of 1956
(the
"BCHA"), the requirements of the Glass-Steagall Act and certain other
laws and
regulations. Although the effects of the merger of Travelers and
Citicorp and
compliance with the requirements of the BCHA and the Glass-Steagall Act
are
still under review, Salomon Brothers Asset Management does not believe
that its
compliance with applicable law following the merger of Travelers and
Citicorp
will have a material adverse effect on its ability to continue to
provide the
Fund with the same level of investment advisory services that it
currently
receives.
- -----------------------------------------------------------------------
- ---------
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
42
<PAGE>
- -----------------------------------------------------------------------
- ---------
Distributor (continued)
- -----------------------------------------------------------------------
- ---------
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.
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, National Association located at 17th & Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Company's
investments.
43
<PAGE>
- -----------------------------------------------------------------------
- ---------
Additional Information (continued)
- -----------------------------------------------------------------------
- ---------
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 each Class will have one vote for each full share
owned
and a proportionate fractional vote for any fractional share held of
that Class.
Generally, shares of the Company will be voted on a Company-wide basis
on all
matters except matters affecting only the interests of one Fund or one
Class of
shares.
The Fund sends each of its shareholders a semi-annual report and an
audited
annual report, which include listings of the investment securities held
by the
Fund at the end of the period covered. In an effort to reduce the
Fund's
printing and mailing costs, the Company plans to consolidate the
mailing of its
semi-annual and annual reports by household. This consolidation means
that a
household having multiple accounts with the identical address of record
will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their accounts should contact their Smith
Barney
Financial Consultants or First Data.
44
<PAGE>
SMITH BARNEY
---
- ---------
A Member of
TravelersGroup[Logo]
Smith Barney
Investment
Grade Bond
Fund
388
Greenwich Street
New York, New
York 10013
FD
0233 4/98
Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
April 30, 1998
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, 1998, 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 14
Redemption of Shares 15
Distributor 16
Valuation of Shares 18
Exchange Privilege 19
Performance Data (See in the Prospectus "Performance") 19
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes") 23
Additional Information 27
Financial Statements 27
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")
Mutual Management Corp. ("MMC") (formerly Smith Barney Mutual Fund
Management Inc.)
Distributor (Concert Peachtree Growth 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 57). 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 74). Private investor. His address
is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Dwight B. Crane, Director (Age 60). Professor, Graduate School
of Business Administration, Harvard University. His address is
Graduate School of Business Administration, Harvard University,
Boston, Massachusetts 02163.
Frank G. Hubbard, Director (Age 62). 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.
*Heath B. McLendon, Chairman of the Board, President and Chief
Executive Officer (Age 64). 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.; Vice Chairman of Shearson Asset Management; a
Director of PanAgora Asset Management, Inc. and PanAgora Asset
Management Limited. Mr. McLendon is a director of 42 investment
companies associated with Smith Barney. His address is 388
Greenwich Street, New York, New York 10013.
Ken Miller, Director (Age 56). President of Young Stuff Apparel
Group, Inc. His address is 1411 Broadway, New York, New York
10018.
John F. White, Director Emeritus (Age 80). 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.
James Conroy, Vice President and Investment Officer. Managing
Director of Smith Barney. His address is 388 Greenwich Street, New
York, New York 10013.
John Stoeser, Vice President and Investment Officer. Prior to April
1998 Vice President and Research Analyst of the Fund. Prior to
July 1997, Assistant Vice President, Portfolio Manager and Research
Analyst Safeco Asset Management Company. His address is 500 108th
Avenue, Suite 1900 North E., Bellevue, Washington 98004.
George E. Mueller, Jr., Vice President and Investment Officer.
Managing Director of MMC; 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 President and Investment Officer.
Managing Director of MMC; prior to July 1993, Managing Director of
Shearson Lehman Advisors. His address is 388 Greenwich Street,
New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Director and Senior Vice President of MMC. Mr. Daidone serves as
Senior Vice President and Treasurer of 42 investment companies
associated with Smith Barney. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing Director of
Smith Barney and Secretary of MMC; General Counsel and Secretary
of MMC. Ms. Sydor serves as Secretary of 42 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 April 20, 1998, the Directors and officers
of the Company, as a group, owned less than 1.00% of the
outstanding common stock of the Company.
As of April 20, 1998 to the knowledge of the Funds and the Board of
Directors, no single shareholder or group (as the term is used in
Section 13(d) of the Securities Act of 1934) beneficially owned
more than 5% of the outstanding shares of the Fund with the
exception of the following:
FUND
CLASS
PERCENT
NAME
ADDRESS
Special Equities Fund
Y
57.4964%
Smith Barney
Concert Series, Inc.
High Growth Port, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Special Equities Fund
Y
36.2424
Smith Barney
Concert Series, Inc.
Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Special Equities Fund
Z
100.00
CitiBank NA TTEE
Travelers Group Master Trust
Smith Barney 401K Savings Plan
ATTN: Nancy Kronenberg
111 Wall Street
FISD/20th Floor
New York, NY 10043
Managed Growth Fund
Y
51.6760
Smith Barney
Concert Series, Inc.
Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Managed Growth Fund
Y
41.7579
Smith Barney
Concert Series, Inc.
High Growth Port, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Managed Growth Fund
Z
100.00
CitiBank NA TTEE
Travelers Group Master Trust
Smith Barney 401K Savings Plan
ATTN: Nancy Kronenberg
111 Wall Street
FISD/20th Floor
New York, NY 10043
Government Securities Fund
C
6.2144
Geoffrey K. Burke
Smith Barney Inc. Rollover Cust.
Savings Incentive Plan
245 Uwquaha Road
Fairfield CT 06430
Government Securities Fund
Y
57.8514
Smith Barney
Concert Series, Inc.
Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Government Securities Fund
Y
16.9109
Smith Barney
Concert Series, Inc.
Balanced Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Government Securities Fund
Y
8.9388
Smith Barney
Concert Series, Inc.
Conservative Port., PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Government Securities Fund
Y
7.4300
Smith Barney
Concert Series, Inc.
Income Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Investment Grade Bond Fund
Y
92.6039
Smith Barney
Concert Series, Inc.
Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Investment Grade Bond Fund
Y
7.3960
Smith Barney
Concert Series, Inc.
Select Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Concert Peachtree Growth Fund
B
96.7095
PFS Shareholder Services (b)
ATTN: Jay Barnhill
3100 Breckinridge Blvd
Duluth GA 30199
FUND
CLASS
PERCENT
NAME
ADDRESS
Concert Peachtree Growth Fund
C
9.1312
Richard Love
Smith Barney Inc. Rollover Cust.
25 Muirwoods Court
Annapolis MD 21403
Concert Peachtree Growth Fund
C
7.8865
Allen Francis Schafer
Smith Barney Inc. Rollover Cust.
20 Cortes Court
San Rafael CA 94903
Concert Peachtree Growth Fund
C
6.5776
David Deichler
Smith Barney Inc. Rollover Cust.
513 Raven Pl
Clayton CA 94517
Concert Peachtree Growth Fund
C
5.8060
Victor B Karoblis and
Laura E Karoblis CO-TTEES
Karoblis Trust
1953 San Marco Road
Marco Island FL 34145
Concert Peachtree Growth Fund
C
5.0246
Richard D Reed
16 Pickering Way
Nashua NH 03063
Concert Peachtree Growth Fund
Y
52.1378
Smith Barney
Concert Series, Inc.
Growth Portfolio, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
Concert Peachtree Growth Fund
Y
41.3077
Smith Barney
Concert Series, Inc.
High Growth Port, PNC Bank NA
ATTN: Beverly Timson
210 Stevens Drive Suite 440
Lester PA 19113
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. During the fiscal year ended December 31, 1997 such
expenses totaled $10,097. For the fiscal year ended December 31,
1997, the Directors of the Company were paid the following
compensation:
Director
Aggregate Compensation
From the Fund**
Pension Or Retirement Benefits
Accrued As Part of the Fund Expenses
Aggregate Compensation
From the Smith Barney Mutual Funds
Paul R. Ades (7)
$26,200
$0
$49,000
Herbert Barg (20)
28,700
0
101,600
Alger B. Chapman (9)+
19,600
0
35,125
Dwight B. Crane (26)
26,100
0
133,850
Frank G. Hubbard (7)
28,700
0
52,000
Heath B. McLendon (42)
- ---
0
- ---
Jerome Miller (2)
- -0-
0
12,400
Ken Miller (7)
28,700
0
52,000
John F. White (7)*
28,700
0
52,000
+ Mr. Chapman's compensation reflects his resignation from the
Board of Directors effective June 20, 1997.
* For 1997 Mr. White deferred all of
his compensation from the Fund and
from Smith Barney Mutual Funds.
** Upon attainment of age 80 Directors are required to change
to emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they
are paid 50% of the annual retainer fee and meeting fees otherwise
applicable to the Fund Directors together with reasonable out-of-
pocket expenses for each meeting attended. During the Fund's last
fiscal year aggregate compensation paid by the Fund to Directors
emeritus totaled $25,000. Effective March 9, 1998 Mr. White became
a Director Emeritus.
Investment Adviser and Administrator - MMC
MMC 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
MMC effective November 7, 1994, from its affiliate, Mutual
Management Corp. Mutual Management Corp. was and MMC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings") (formerly Smith Barney 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 24, 1997. MMC bears all
expenses in connection with the performance of its services. The
services provided by MMC under the Advisory Agreements are
described in the Prospectuses under "Management of the Company and
the Fund." MMC provides investment advisory and management
services to investment companies affiliated with Smith Barney.
As compensation for investment advisory and administrative services
rendered to Managed Growth Fund and Concert Peachtree Growth Fund,
Managed Growth Fund pays MMC a fee computed daily and paid monthly
at the annual rate of 0.85% and Concert Peachtree Growth Fund pays
MMC a fee computed daily and paid monthly at the annual rate of
1.00% up to $250 million and 0.85% thereafter, respectively, of the
value of their average daily net assets.
As compensation for investment advisory services rendered to
Special Equities Fund, the Fund pays MMC a fee computed daily and
paid monthly at the annual rate of 0.55% of the value of its
average daily net assets.
As compensation for investment advisory services rendered to
Government Securities Fund, the Fund pays MMC 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.
As compensation for investment advisory services rendered to
Investment Grade Bond Fund, the Fund pays MMC a fee computed daily
and paid monthly at the following annual rates of average daily net
assets: 0.45% up to $500 million and 0.42% on net assets
thereafter.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
Funds accrued advisory fees as follows:
Fund
1995
1996
1997
Investment Grade Bond Fund
$2,067,222
$2,198,162
$2,183,438
Government Securities Fund..................
2,287,647
1,979,639
1,900,510
Special Equities Fund
1,276,355
3,094,925
3,748,595
Managed Growth Fund
2,022,754
6,034,652
8,127,871
Concert Peachtree Growth Fund
390,902
1,040,355
1,262,626
MMC 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 MMC under the Administration Agreement are
described in the Prospectuses under "Management of the Company and
the Fund." MMC 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.
As compensation for administrative services rendered to each of
Investment Grade Bond Fund, Government Securities Fund and Special
Equities Fund, MMC 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, 1995, 1996 and
1997, these Funds paid administrative fees to MMC as follows:
MMC
Fund
For the Fiscal
Year Ended
12/31/95
For the Fiscal
Year Ended
12/31/96
For the Fiscal
Year Ended
12/31/97
Investment Grade Bond Fund
$918,765
$976,938
$969,973
Government Securities Fund
1,307,222
1,131,222
1,086,006
Special Equities Fund
464,129
1,125,428
1,363,125
Counsel and Auditors
Willkie Farr & Gallagher LLP. 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, 1998.
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, MMC 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 Investment Company Act of 1940 (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 value of a
Fund's total assets (including the amount borrowed) valued at the
lesser cost or market less liabilities (other than obligations
under such agreements) valued at the time the borrowing is made.
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
Concert Peachtree Growth Fund may enter into firm commitment
agreements and purchase when-issued securities, as described 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.
Consistent with applicable regulatory requirements each Fund has
the ability to lend securities from its portfolio to brokers,
dealers and other financial organizations. 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 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
MMC to be of good standing and will not be made unless, in the
judgment of MMC, 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 MMC 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 security
holder 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 security holder 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
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 or 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. The Fund may also invest in smaller capitalized
companies representing the broad benchmarks against which the Fund
is frequently judged by utilizing an active quantitative oriented
investment strategy.
Investment Restrictions
The Fund's investment objectives and investment restrictions 1-7
set forth below are fundamental policies of each Fund (except as
otherwise indicated), i.e., they may not be changed with respect to
a Fund without a majority vote of the outstanding shares of that
Fund. Investment Restrictions 8 through 13 may be changed by the
Board of Directors without the approval of shareholders. (All other
investment practices described in the Prospectuses and this
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. Invest in a manner that would cause it to fail to be
a "diversified company" under the 1940 Act and the
rules, regulations and orders thereunder.
2. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the Fund from (a) investing in securities
of issuers engaged in the real estate business or the
business of investing in real estate (including interests in
limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c)
trading in futures contracts and options on futures
contracts (including options on currencies to the extent
consistent with the Funds' investment objective and
policies); or (d) investing in real estate investment trust
securities.
3. Make loans. This restriction does not apply to: (a)
the purchase of debt obligations in which the Fund may
invest consistent with its investment objectives and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under
the 1940 Act.
4. Invest more than 25% of its total assets in
securities, the issuers of which conduct their principal
business activities in the same industry. For purposes of
this limitation, securities of the U.S. government
(including its agencies and instrumentalities) and
securities of state or municipal governments and their
political subdivisions are not considered to be issued by
members of any industry.
5. Issue "senior securities" as defined in the 1940
Act and the rules, regulations and orders thereunder, except
as permitted under the 1940 Act and the rules, regulations
and orders thereunder.
6. Restriction Applicable to all funds except
Government Securities Fund. The Funds may not: Borrow
money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Fund may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward
roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions
described in (a) and (b), the Fund will be limited so that
no more than 33-l/3% of the value of its total assets
(including the amount borrowed), valued at the lesser of
cost or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made, is
derived from such transactions.
7. Restriction Applicable to all funds except Special
Equities Fund, Concert Peachtree Growth Fund and Managed
Growth Fund. The Funds may not: 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.
8. Invest in oil, gas or other mineral exploration or
development programs
9. Make investments in securities for the purpose of
exercising control over or management of the issuer;
10. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any
securities short (except "against the box"). For purposes
of this restriction, the deposit or payment by the Fund of
underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related
options and options on securities, indexes or similar items is
not considered to be the purchase of a security on margin;
11. 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);
12. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid;
13. Restrictions Applicable to all funds except
Government Securities Fund. The Funds may not: Write,
purchase or sell puts, calls, straddles, spreads or any
combinations thereof (the Managed Growth Fund and the
Concert Peachtree Growth Fund each may write or purchase
puts, calls, straddles, spreads and any combination thereof
up to 5% of their assets).
Brokerage
In selecting brokers or dealers to execute securities transactions
on behalf of a Fund, MMC seeks the best overall terms available.
In assessing the best overall terms available for any transaction,
MMC 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 MMC, 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 MMC or its affiliates
exercise investment discretion. The fees under the investment
advisory agreements and the administration agreement between the
Company and MMC 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 MMC, 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
amounts.
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
Concert Peachtree Growth
Fund
Total Brokerage Commissions
1995
$56,735
$164,975
$201,706
1996
378,451
1,272,702
716,937
1997
894,872
658,099
891,375
Commissions paid to Smith Barney
1995
$11,052
$140,970
$650
1996
47,100
166,656
21,680
1997
53,748
167,712
20,784
% of Total Brokerage
Commissions paid to
Smith Barney
1997
6.0%
25.5%
2.3%
% of Total Transactions
Involving Commissions paid
to Smith Barney
1997
3.6%
12.5%
1.7%
_____________________
No commissions were paid by the Investment Grade Bond Fund and
Government Securities 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 MMC 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 MMC, and
portfolio turnover will not be a limiting factor should MMC 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, 1995,1996 and 1997, the
portfolio turnover rates were as follows:
Fund
1995
1996
1997
Investment Grade Bond Fund
49%
48%
39%
Government Securities Fund
294
420
274
Special Equities Fund
113
118
145
Managed Growth Fund............................................
6
34
35
Concert Peachtree Growth
Fund............................................
51
183
227
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).
MMC 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 MMC 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 is
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
contact 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 24, 1997.
PFS serves as one of the Company's distributors with respect to the
Concert Peachtree Growth 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 24, 1997.
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, 1997, Smith Barney incurred
distribution expenses totaling approximately $14,900,000 consisting
of approximately $557,439 for advertising, $87,008 for printing and
mailing of Prospectuses, $5,555,333 for support services,
$5,722,178 to Smith Barney Financial Consultants, and $94,410 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
Concert Peachtree Growth 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 Concert Peachtree Growth 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 Concert Peachtree
Growth 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 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$181,000
$182,000
$122,000
Government Securities Fund
63,000
65,000
50,000
Special Equities Fund
347,000
1,800,000
381,000
Managed Growth Fund...............................
5,400,000
1,700,000
608,000
Concert Peachtree Growth Fund..................
18,000
18,000
4,000
CDSC paid to Smith Barney.
Class B
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$541,000
$422,000
$375,000
Government Securities Fund
512,000
305,000
180,000
Special Equities Fund
379,000
658,000
1,514,000
Managed Growth Fund...............................
174,000
1,112,000
1,167,000
Concert Peachtree Growth Fund..................
-
3,000
3,000
Class C
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$5,000
$1,000
$1,000
Government Securities Fund
5,000
-
-
Special Equities Fund
1,000
22,000
17,000
Managed Growth Fund...............................
10,000
27,000
9,000
Concert Peachtree Growth Fund.................
-
1,000
-
Service Fees
Class A
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$505,094
$524,533
$508,201
Government Securities Fund
1,212,522
1,026,748
920,147
Special Equities Fund
286,910
525,204
512,879
Managed Growth Fund...............................
189,955
495,536
581,527
Concert Peachtree Growth Fund................
63,606
162,606
175,590
Class B
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund .
$638,293
$662,187
$604,461
Government Securities Fund .
419,433
340,572
272,331
Special Equities Fund .
283,978
696,750
768,448
Managed Growth Fund...............................
351,874
1,024,802
1,327,608
Concert Peachtree Growth Fund.................
34,096
96,931
105,790
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$5,068
$14,456
$17,704
Government Securities Fund
2,078
3,050
4,326
Special Equities Fund
8,675
56,094
58,273
Managed Growth Fund...............................
47,170
141,702
186,753
Concert Peachtree Growth Fund.................
23
552
445
Distribution Fees
Class B
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$ 1,276,588
$ 1,324,350
$1,208,922
Government Securities Fund
838,868
681,144
544,662
Special Equities Fund
851,933
2,090,250
2,305,342
Managed Growth Fund...............................
1,055,621
3,074,405
3,982,825
Concert Peachtree Growth Fund..................
102,289
290,792
317,370
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended 12/31/97
Investment Grade Bond Fund
$ 9,124
$ 26,020
$35,407
Government Securities Fund
3,741
5,491
7,786
Special Equities Fund
26,026
168,282
174,819
Managed Growth Fund...............................
141,508
425,107
560,257
Concert Peachtree Growth Fund..................
71
1,657
1,334
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,
Martin Luther King Jr., 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 their 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, MMC, 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
MMC, 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 determined by the Pricing
Service. The procedures of the Pricing Service are reviewed
periodically by the officers of the Company under the general
supervision and responsibility of the Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney
Mutual Funds may exchange all or part of their shares for shares of
the same class of other funds of the Smith Barney Mutual Funds, to
the extent such shares are offered for sale in the shareholder's
state of residence 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-bcd + 1)6 - 1]
Where:
a =
Dividends and interest earned during the period.
b =
Expenses accrued for the period (net of reimbursement).
c =
the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d =
the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a"
in the formula) on debt obligations purchased by the Fund at a
discount or premium, the formula generally calls for amortization
of the discount or premium; the amortization schedule will be
adjusted monthly to reflect changes in the market values of the
debt obligations.
Investors should recognize that in periods of declining interest
rates a Fund's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates,
the Fund's yield will tend to be somewhat lower. In addition, when
interest rates are falling, the inflow of net new money to the Fund
from the continuous sales of its shares will likely be invested in
portfolio instruments producing lower yields than the balance of
the Fund's investments, thereby reducing the current yield of the
Fund. In periods of rising interest rates, the opposite can be
expected to occur.
Average Annual Total Return
"Average annual total return" figures, as described below, are
computed according to a formula prescribed by the SEC. The formula
can be expressed as follows:
P(1+T)n = ERV
Where:
P =
a hypothetical initial payment of $1,000.
T =
average annual total return.
n =
number of years.
ERV =
Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year period at the end of the 1-5-
or 10- year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions. A Class' total
return figures calculated in accordance with the above formula
assume that the maximum applicable sales charge or maximum
applicable CDSC, as the case may be, has been deducted from the
hypothetical $1,000 initial investment at the time of purchase or
redemption, as applicable.
Class A average annual total returns were as follows for the
periods indicated:
Name of Fund
Year Ended
December 31, 1997
Inception*
Through December 31, 1997
Investment Grade Bond Fund
11.82%
10.55%
Government Securities Fund
6.32
6.31
Special Equities Fund
(10.38)
13.25
Managed Growth Fund
7.99
10.20
Concert Peachtree Growth Fund
0.10
11.25
__________________
* The Investment Grade Bond, Government Securities and Special
Equities Funds commenced selling Class A shares on November 6,
1992. The Managed Growth Fund and Concert Peachtree Growth 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, 1997
Five Year
Period Ended
December 31, 1997
Ten Year
Period Ended
December 31, 1997(1)
Inception Through
December 31, 1997
Investment Grade Bond Fund
11.94%
10.55%
10.82%
12.19%
Government Securities Fund
6.32
6.32
8.19
8.31
Special Equities Fund
(11.06)
11.81
10.81
9.34
Managed Growth Fund
7.84
N/A
N/A
10.61
Concert Peachtree Growth Fund
(0.60)
N/A
N/A
11.64
__________________
(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
12/31/97
Inception
Through 12/31/97
Investment Grade Bond Fund (1)
15.41%
9.54%
Government Securities Fund (2)
9.75
6.04
Special Equities Fund (3)
(7.31)
4.47
Managed Growth Fund (4)
11.91
11.66
Concert Peachtree Growth Fund (5) .............
3.38
11.00
__________________
(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 during
of the specified period and are computed by the following formula:
AGGREGATE TOTAL RETURN = ERV-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 (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, 1997**
Period from
Inception
through
December 31,1997**
One Year
Period Ended
December 31,1997***
Period from
Inception
Through
December 31, 1997***
Investment Grade Bond Fund
17.10%
75.56%
11.82%
67.66%
Government Securities Fund
11.23
43.49
6.23
37.04
Special Equities Fund
(5.66)
99.58
(10.38)
89.65
Managed Growth Fund
13.70
34.30
7.99
27.60
Concert Peachtree Growth Fund
5.18
37.38
(0.10)
30.54
* 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 Concert Peachtree
Growth 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,
1997*
Five Year
Period
Ended
Dec. 31,
1997*
Ten Year
Period
Ended
Dec. 31,
1997*
One Year
Period
Ended
Dec. 31,
1997**
Five Year
Period
Ended
Dec. 31,
1997**
Ten Year
Period
Ended
Dec. 31,
1997**(1)
Period from
Inception
Through
Dec. 31,
1997**
Investment Grade
Bond Fund
16.44%
66.12%
179.30%
11.94%
65.12%
179.30%
530.01%
Government
Securities Fund
10.82
36.86
119.62
6.32
35.86
119.62
198.20
Special Equities
Fund
(6.38)
75.78
179.14
(11.06)
74.78
179.14
283.64
Managed Growth
Fund
12.84
N/A
N/A
7.84
N/A
N/A
28.79
Concert Peachtree Growth Fund
4.40
N/A
N/A
(0.60)
N/A
N/A
31.80
* 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, 1997 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, 1997**
Period from
Inception*
Through
Dec. 31,1997**
One Year
Period Ended
Dec. 31, 1997***
Period from
Inception*
Through
Dec. 31, 1997***
Investment Grade Bond Fund
16.41%
55.50%
15.41%
55.50%
Government Securities Fund
10.75
33.33
9.75
33.33
Special Equities Fund
(6.38)
20.21
(7.31)
20.21
Managed Growth Fund
12.91
31.87
11.91
31.87
Concert Peachtree Growth Fund
4.38
28.47
3.38
28.47
* Investment Grade Bond Fund, Government Securities Fund, Special
Equities Fund, Managed Growth Fund and Concert Peachtree Growth
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. 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 gains or
losses from the affected 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 Funds (with the
exception of 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 a 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 reduce 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 the investor.
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 [for
individuals, the maximum tax rate for long-term capital gains is
28% , (20% if the shares have been held for more than 18 months)]
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, National Association 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 each Funds
portfolio 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, 1997 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 a 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 an unauthorized 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. 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.
47
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