As filed with the Securities and Exchange Commission
on December 23, 1998
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Registration No. 2-74288
811-3275
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 54
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940,
Amendment No. 56
SMITH BARNEY INVESTMENT FUNDS INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
(800)-451-2010
(Registrant's Telephone Number, including Area Code:)
Christina T. Sydor
388 Greenwich Street, New York, New York 10013(22nd
Floor)
(Name and Address of Agent For Service)
Continuous
(Approximate Date of Proposed Public Offering)
It is proposed that this filing will become effective:
immediately upon filing pursuant to Paragraph (b) of Rule 485
On (date) pursuant to paragraph (b) of Rule 485
XXX 60 days after filing pursuant to paragraph (a)(1) of Rule 485
On (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
On (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
This post-effective amendment designates a new
effective date for a previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Common
Stock
SMITH BARNEY INVESTMENT FUNDS
PART A
SMITH BARNEY
Small Cap
Value
Fund
DECEMBER 28, 1998
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS DECEMBER 28, 1998
Smith Barney
Small Cap Value Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Small Cap Value Fund (the "Fund") is a mutual fund that seeks
long-term growth of capital by investing, under normal market conditions, at
least 65% of its total assets in the equity securities of smaller capitalized
companies. Smaller capitalized companies are those whose market capitalization
is no greater than the market capitalization of companies in the Russell
2000 Value Index (the "Index") at the time of the Fund's investment. The size
of the companies in the Index changes with market conditions and the
composition of the Index. As of November 30, 1998, the largest market
capitalization of a stock in the Index was $2.51 billion.
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.
The initial subscription period for shares is scheduled to end on February
22, 1999, (the "Subscription Period"). After the expiration of the Subscription
Period or a limited continuous offering period, the Fund will suspend the
offering of shares to the public. A continuous offering of shares is
expected to commence on or about March 29, 1999. See "Purchase of Shares."
This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Shares of the other Funds offered by the Company are described in separate
prospectuses that may be obtained by calling the Company at 1-800-451-2010.
Additional information about the Fund is contained in a Statement of Addi-
tional Information, (the "SAI") dated December 28, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The SAI has been
filed with the Securities and Exchange Commission (the "SEC") and is incorpo-
rated by reference into this Prospectus in its entirety.
CFBDS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 10
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VALUATION OF SHARES 12
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DIVIDENDS, DISTRIBUTIONS AND TAXES 12
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PURCHASE OF SHARES 14
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EXCHANGE PRIVILEGE 23
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REDEMPTION OF SHARES 26
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MINIMUM ACCOUNT SIZE 29
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PERFORMANCE 29
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MANAGEMENT OF THE COMPANY AND THE FUND 30
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DISTRIBUTION 31
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ADDITIONAL INFORMATION 32
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APPENDIX A A-1
</TABLE>
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No person has been authorized to give any information or to make any repre-
sentations 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 distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor 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
<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 this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management invest-
ment company whose investment objective is to seek long-term growth of capital
by investing, under normal market conditions, at least 65% of its total assets
in the equity securities of smaller capitalized companies . Smaller
capitalized companies are those whose market capitalization
is no greater than the market capitalization of companies in the Index
at the time of the Fund's investment. The size
of the companies in the Index changes with market conditions and the
composition of the Index. As of November 30, 1998, the largest market
capitalization of a stock in the Index was $2.51 billion. 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 L
shares, which differ principally in terms of sales charges and rates 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 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 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 been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00%. 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 L shares within
12 months of purchase. The CDSC may be waived for certain redemptions.
The Class L 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 L
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 duration 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
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.
Class L shares which have a lower upfront sales charge but are sub-
ject to higher distribution fees than Class A shares, are suitable for invest-
ors who are not investing or intending to invest an amount which would receive
a substantive sales charge discount and who have a short-term or undetermined
time frame.
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 L 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 L 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 pur-
chases 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 pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in Smith Barney Mutual Funds 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 L shares, purchasers eligible to pur-
chase Class A shares at net asset value or at a reduced sales charge should
consider doing so.
Salomon Smith Barney Financial Consultants may receive different
compensation for selling different Classes of shares. Investors should
understand that the purpose of the CDSC on certain Class A shares, the
Class B and Class L shares is the same as that of an initial sales charge.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and
"Exchange Privilege" for other differences between the Classes of shares.
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. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available as investment
alternatives under both of these programs. See "Purchase of Shares--Smith Bar-
ney 401(k) and ExecChoice(TM) Programs."
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.
PURCHASE OF SHARES Shares may be purchased through a Salomon Smith Barney
Financial Consultant during the Initial Subscription Period. During the contin-
uous offering period, shares may also be purchased through a Salomon Smith Bar-
ney Financial Consultant, a broker that clears securities transactions through
Salomon Smith Barney Inc. ("Salomon Smith Barney") on a fully disclosed basis
or an investment dealer in the selling group. (An investment dealer in the
selling group and a broker that clear securities through Salomon Smith Barney
are collectively referred to as "Dealer Representatives.") In addition, certain
investors,
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investors Services Group, Inc. ("First Data" or
"Transfer Agent"). See "Purchase of Shares." The initial subscription period
for shares is scheduled to end on February 22, 1999, (the "Subscription Peri-
od"). After the expiration of the Subscription Period or a limited continuous
offering period, the Fund will suspend the offering of shares to the public. A
continuous offering of shares is expected to commence on or about March 29,
1999. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 L shares and the subse-
quent 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. There is no minimum investment required
in Class A shares for unitholders who invest distributions from a unit invest-
ment trust ("UIT") sponsored by Salomon Smith Barney. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN During the continuous offering period, the Fund
offers shareholders a Systematic Investment Plan under which they may autho-
rize 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 L 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" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Fund's investment manager. The Manager is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc, ("Holdings") formerly known as Smith Barney
Holdings. Holdings is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial
services--asset management, banking and consumer finance, credit and charge
cards,
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
insurance, investments, investment banking and trading--and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty.
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 Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The value of the Fund's invest-
ments, and thus the net asset value of the Fund's shares, will fluctuate in
response to changes in market and economic conditions, as well as the finan-
cial condition and prospects of issuers in which the Fund invests. The Fund
may invest in foreign securities, though management intends to limit such
investments to 10% of the Fund's assets. Foreign investments may include addi-
tional risks associated with currency exchange rates, less complete financial
information about individual companies, less market liquidity and political
instability. See "Investment Objective and Management Policies."
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 estimated operating expenses:
<TABLE>
<CAPTION>
SMITH BARNEY
SMALL CAP VALUE FUND CLASS A CLASS B CLASS L CLASS Y
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None 1.00% None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) None* 5.00% 1.00% None
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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*** 0.25 0.25 0.25 0.25
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TOTAL FUND OPERATING EXPENSES 1.25% 2.00% 2.00% 1.00%
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</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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers ("NASD").
*** "Other Expenses" have been estimated based on expenses the Fund
expects to incur during its fiscal year ending September 30, 1999.
Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, 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 a Salomon 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 L 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." Salomon Smith Barney receives an annual 12b-1
service fee of 0.25% of the value of average daily net assets of Class A
shares. For Class B and Class L shares, Salomon Smith Barney receives an an
ing fees, printing costs and registration fees.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY
SMALL CAP VALUE FUND 1 YEAR 3 YEARS
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<S> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and (2) redemp-
tion at the end of each time period:
Class A.................................................... $62 $88
Class B.................................................... 70 93
Class L.................................................... 40 72
Class Y.................................................... 10 32
An investor would pay the following expenses on the same
investment, assuming the same annual return and no redemp-
tion:
Class A.................................................... $62 $88
Class B.................................................... 20 63
Class L.................................................... 30 72
Class Y.................................................... 10 32
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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 A REPRESENTA-
TION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long-term growth of capital. This invest-
ment objective may not be changed without the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing, under
normal market conditions, substantially all of its assets in equity securities
and at least 65% of its total assets in equity securities of smaller capital-
ized companies. Smaller capitalized companies are those whose market
capitalization is no greater than the market capitalization of companies
in the Index at the time of the Fund's investment. The size
of the companies in the Index changes with market conditions and the
composition of the Index. As of November 30, 1998, the largest market
capitalization of a stock in the Index was $2.51 billion.. Companies whose
capitalization falls outside this
range after purchase continue to be considered smaller capitalized companies
for purposes of the 65% policy. Investments in smaller companies may offer
greater opportunities for growth of capital than larger, more established com-
panies, but may also involve certain risks because smaller capitalized compa-
nies often have limited market or financial resources and may be dependent on
one or two people for management. In addition, shares of small capitalized
companies have limited liquidity and more volatility which could result in
significant fluctuations in the price of their shares.
In selecting the Fund's equity investments, the Manager seeks to identify
companies that exhibit value attributes. When selecting stocks with value
characteristics, the Manager will typically be looking at small cap
companies exhibiting lower price-to-book and earnings ratios and higher
dividend yields than companies with growth characteristics. In addition,
the Manager may utilize an active
quantitative investment strategy for a portion of the Fund. This portion will
provide added diversification and, in addition, 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 secu-
rities, the Fund's portfolio manager is supported by a quantitatively oriented
investment team.
The Fund will normally invest in all types of equity securities, including
common stocks, preferred stocks, securities that are convertible into common
or preferred stocks, such as warrants and convertible bonds, and depository
receipts for those securities. It is the policy of the Fund to be as fully
invested in equity securities as practicable at all times. Under certain cir-
cumstances, the Fund may maintain a portion of its assets, which will usually
not exceed 10%, in U.S. Government securities, money market obligations, and
in cash to provide for payment of the Fund's expenses and to meet redemption
requests. The Fund reserves the right, as a defensive measure, to hold money
market securities, including repurchase agreements or cash, in such propor-
tions as, in the opinion of management, prevailing market or economic condi-
tions warrant.
Consistent with its investment objective and policies described above, the
Fund may invest up to 10% of its total assets in foreign securities, including
both
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
direct investments and investments made through depository receipts. The Fund
may also invest in real estate investment trusts; purchase or sell securities
on a when-issued or delayed-delivery basis; enter into forward commitments to
purchase securities; lend portfolio securities; purchase and sell put and call
options; invest in illiquid securities;
and enter into interest rate futures contracts, stock index futures
contracts and related options.
The different types of securities and investment techniques used by the Fund
all involve risks of varying degrees. For example, with respect to common
stock, there can be no assurance of capital appreciation, and there is a risk
of market decline. With respect to debt securities, including money market
instruments, there is the risk that the issuer of a security may not be able to
meet its obligation to make scheduled interest or principal payments. See
Appendix A for a more complete discussion of certain of these securities and
investment techniques and the associated risks.
PORTFOLIO TRANSACTIONS AND TURNOVER
Transactions on behalf of the Fund are allocated to various brokers and deal-
ers by the Manager in its best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, brokers and dealers, including Salomon Smith Barney,
may be selected for research, statistical or other services to enable the
Manager to supplement its own research and analysis with the views and
information of other securities firms.
The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that its annual turnover normally will not exceed 150%. An annual turn-
over rate of 100% would occur if all of the securities held by the Fund were
replaced once during a period of one year. The Manager will not consider turn-
over rate a limiting factor in making investment decisions consistent with the
Fund's investment objective and policies.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders who hold their shares in bro-
kerage accounts maintained with Salomon Smith Barney depend on the smooth func-
tioning 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 securi-
ties
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
trades, pricing and account services. The Manager and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer sys-
tems 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, the Manager has been advised by the Fund's custodian,
transfer agent, distributor 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 the Manager, Salomon Smith Barney or any other service
provider will be successful, or that interaction with other non-complying com-
puter systems will not impair Fund services at that time.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar 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 as
determined by or under the direction of the Company's Board of Directors.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.
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
capital gain distributions will be
12
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
reinvested automatically in additional shares of the same Class at net asset
value, with no additional sales charge or CDSC. A shareholder
may change the option at any time by notifying his or her Salomon Smith
Barney Financial Consultant or their financial consultant or Dealer
Representative. Shareholders whose accounts are held directly by
First Data should notify First Data in writing, requesting a change to
this reinvest option.
The per share amounts of dividends from net investment income on Classes B
and L may be lower than that of Classes A and Y, mainly as a result of the dis-
tribution fees applicable to Class B and L 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, L 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 SAI for further discus-
sion. In addition to the considerations described below and in the SAI, there
may be other federal, state, local, and/or foreign tax implications to consid-
er. 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 will be treated as a separate entity of the Company for Federal
Income Tax purposes. The Fund intends to qualify 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, 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.
13
<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 dis-
position. 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
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for share-
holders 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.
PURCHASE OF SHARES
GENERAL
The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class L shares are sold to investors with an initial sales charge and
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 invest-
ors 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.
INITIAL SUBSCRIPTION PERIOD
During the Initial Subscription Period, subscriptions for shares must be
made through a Salomon Smith Barney Financial Consultant. Shares of the Fund
subscribed for during the Subscription Period for which the Fund accepts pur-
chase orders will be issued and sold by the Fund on the third business day
after the end of the Subscription Period (the "Purchase Date"). Also on the
Purchase Date, shareholders of other funds of the Smith Barney Mutual Funds
will be able to exchange shares of such funds for shares of the Fund. On the
Purchase Date, the Fund will issue shares for which it has received and
accepted subscriptions and commence operations.
The Fund is offering its Class A shares to the public at a maximum purchase
price per share of $12.00, which equals the Class A share initial net asset
value
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
per share of $11.40 plus the maximum sales charge set forth below under
"Continuous Offerings". The Fund is offering its Class B, Class L and Class Y
shares to the public at each Class' respective initial net asset value per
share of $11.40.
The Fund may in its discretion determine to withdraw the offering without
notice for any reason before the end of the Subscription Period. The Fund also
reserves the right to refuse any order in whole or in part.
CONTINUOUS OFFERINGS
The Fund will suspend the offering of shares to the public immediately after
the expiration of the Subscription Period or within three weeks thereafter.
During the three-week period, the Fund will commence a limited continuous
offering of shares to the public. Once the Fund suspends the offering of
shares to the public (the "Closing Period"), it is expected to do so for 30
days. This period may be lengthened or shortened in the absolute discretion of
the Fund. During the Closing Period, the Fund will invest the proceeds from
its Subscription Period and its continuous offering, if any, and existing
shareholders of the Fund may request redemptions, purchase additional shares
and exchange shares of the Fund for shares of certain other funds of the Smith
Barney Mutual Funds. See "Exchange Privilege." Immediately after the expira-
tion of the Closing Period, the Fund expects to commence a continuous offering
of shares.
During the continuous offering, shares may be purchased through a Salomon
Smith Barney Financial Consultant. Shares may also be purchased through a
Dealer Representative. In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer Representatives may pur-
chase 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 L or Class Y shares. Salomon Smith Barney and Dealer Representatives
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 the Transfer Agent are not subject to a maintenance
fee.
Investors in Class A, Class B and Class L 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 L 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
15
<PAGE>
PURCHASE OF SHARES (CONTINUED)
and Class L 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 require-
ment for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments for Class A shares purchased by employees of Citigroup and its subsidi-
aries, including Salomon Smith Barney, unitholders who invest distributions
from a UIT sponsored by Salomon Smith Barney, Directors or Trustees of any of
the Smith Barney Mutual Funds and their spouses and children. The Fund
reserves the right to waive or change minimums, to decline any order to pur-
chase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Fund's
Transfer Agent. Share certificates are issued only upon a shareholder's writ-
ten request to the Transfer Agent.
Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant 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 Dealer
Representatives 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
the Fund's agent prior to its close of business. For shares purchased through
Salomon Smith Barney or Dealer Representatives purchasing through Salomon
Smith Barney, payment for Fund shares is due on the third business day (the
"settlement date") after the trade date. In all other cases, payments 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, Salomon Smith Barney or the Transfer Agent 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 insuffi-
cient funds to complete the transfer will be charged a fee of up to $25 by
Salomon Smith Barney or the Transfer Agent. The Systematic Investment Plan
also authorizes Salomon Smith Barney to apply cash held in the shareholder's
Salomon Smith Barney brokerage account or redeem the shareholder's shares of a
Salomon Smith Barney money market fund to make additions to the account. Addi-
tional information is available from the Fund or a Salomon Smith Barney Finan-
cial Consultant.
16
<PAGE>
PURCHASE OF SHARES (CONTINUED)
SALES CHARGE ALTERNATIVES
The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a dis-
cussion of factors to consider in selecting which Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE
--------------------------- DEALER'S
AS A % OF AS A % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT TRANSACTION 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 Salomon Smith Barney, which compensates Salomon 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 L shares is waived. See "Deferred
Sales Charge Provisions" 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 "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund made at one
time by "any person," which includes an individual and his or her immediate
family, or a trustee or other fiduciary of a single trust estate or single
fiduciary account.
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. Until June 22, 2001 purchases of Class L
shares by investors who were holders of Class C shares of other
Smith Barney Mutual Funds on June 12, 1998 will not be subject to the
1.00% initial sales charge. See "Deferred Sales Charge Provisions" below.
Class Y Shares. 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
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount).
SALES CHARGE WAIVERS AND REDUCTIONS
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 Citigroup and its subsidiaries and any Citigroup Affiliated Funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-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 Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon 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 Smith Barney Mutual Fund that
is 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 Citigroup; (f) direct rollovers by plan participants
of distributions from a 401(k) plan offered to employees of Citigroup and 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) investments of distributions from a UIT sponsored by
Salomon Smith Barney; and (i) purchases by investors participating in a Salo-
mon Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to per-
mit verification that the purchase would qualify for the elimination of the
sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shares of the Fund and of funds sponsored by Salomon Smith Barney which are
offered with a sales charge as currently 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 infor-
mation 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 mod-
ification or discontinuance at any time with respect to all shares purchased
thereafter.
LETTER OF INTENT
Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent 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 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). 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 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 Salomon Smith Barney Financial Con-
sultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE PROVISIONS
"CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
19
<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 L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class A shares and Class L 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
Salomon 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) Pro-
grams."
<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 fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholders as the total num-
ber of his or her Class B shares converting at the time bears to the total num-
ber 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."
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 divi -
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
dend and capital gain distribution reinvestments in such other funds. For Fed-
eral 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 Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash 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) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other 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 Salomon Smith Bar-
ney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent in the case of all other shareholders) of the sharehold-
er's status or holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM 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.
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Each Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and
Class L 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 a Fund, all of its subsequent investments in the Fund
must be in the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more
of Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class L Shares. Class L shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than
$1,000,000 of Class L 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. 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, if its total
Class L holdings in all non-money market Smith Barney Mutual Funds equal at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class L shares for Class A shares of a Fund. (For Participating Plans that
were originally established through a Salomon 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 enroll-
ment 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 L 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 L shares for Class A
shares of a Fund. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange
offer has been rejected in writing, the exchange will occur on or a
he following March.
Any Participating Plan in the Smith Barney 401(k) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
to exchange all of its Class L shares for Class A shares of a Fund, regardless
of asset size, at the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) Program. Such Plans will be notified
of the pending exchange in writing approximately 60 days before the eighth
anniversary of the enrollment date and, unless the exchange has been rejected
in writing, the exchange will occur on or about the eighth anniversary date.
Once an exchange has occurred, a Participating Plan will not be eligible to
acquire additional Class L shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class L shares not converted will continue to be sub-
ject to the distribution fee.
Participating Plans wishing to acquire shares of a 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 Salomon Smith Barney
Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged
at the net asset value next determined for shares of the same Class in the
following 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 L 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
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Small Cap Growth Fund
Smith Barney Special Equities Fund
23
<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 High Grade Bond 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 Municipal High Income Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
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.--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
24
<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 L and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund.
***Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class L shares of the Fund through the
Smith Barney 401(k) and ExecChoice(TM) Programs may exchange those shares
for Class L 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 CDSC higher
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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
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 ordinarily available, which position the shareholder
25
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
would be expected to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern
of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. 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 shares 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 trad-
ing 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 Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon Smith Barney, from the shareholder directly.
The redemption proceeds will be remitted on or before the third business day
following receipt of proper tender, except on any days on which the NYSE is
closed or as permitted under the Investment Company Act of 1940, as amended
(the "1940 Act"), in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruc-
tion and Salomon 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 Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
26
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, or Dealer Representative or by
submitting a written request for redemption to:
Smith Barney Small Cap Value Fund
Class A, B, L 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 the Transfer Agent 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 or the redemption pro-
ceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's
address of record. The Transfer Agent may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Salomon 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 con-
tact First Data at 1-800-451-2010. Once eligibility is confirmed, the share-
holder must complete and return a Telephone/Wire Authorization Form, including
a signature guarantee, that will be provided by the Transfer Agent upon
request. (Alternatively, an investor may authorize telephone redemptions on
the new account application with a 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.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the
27
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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. (Eastern time) on any day the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are priced 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 or to impose a charge for this service at any
time following at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a share-
28
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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. (With respect
to withdrawal plans in effect prior to November 7, 1994, any applicable CDSC
will be waived on amounts withdrawn that do not exceed 2.00% per month of the
share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant or Dealer Representative.
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 advertise its total return and average annual
total return in advertisements and/or other types of sales literature. These
figures are computed separately for Class A, Class B, Class L 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 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 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 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.
29
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for the management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the persons and companies that furnish serv-
ices to the Fund, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment manager. The SAI contains background
information regarding each Director and executive officer of the Company.
INVESTMENT MANAGER--MMC
The Fund's investment manager, MMC, is a registered investment adviser whose
principal executive offices are located at 388 Greenwich Street, New York, New
York 10013. MMC was incorporated in March, 1968 under the laws of Delaware and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
September 30, 1998 in excess of $108 billion.
Subject to the supervision and direction of the Company's Board of
Directors, the Manager manages the Fund's portfolio in accordance with the
Fund's stated investment objective and policies, makes investment decisions
for the Fund, places orders to purchase and sell securities, and employs
professional portfo-
lio managers and securities analysts who provide research services to the
Fund. For investment management services rendered, the Fund pays the Manager a
monthly fee at the annual rate of 0.75% of the value of the Fund's average
daily net assets.
On October 8, 1998, Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. MMC does not believe that its com-
pliance with applicable law will have a material adverse effect on its
ability to continue to provide the Fund with the same level of investment advi-
sory services that it currently receives.
PORTFOLIO MANAGEMENT
Peter Hable, an Investment Officer of the Manager, President
of Davis Skaggs Investment Management, ("Davis Skaggs")
a division of the Manager and Managing
Director of Salomon Smith Barney, is the portfolio manager and manages the
day-to-day operations of the Fund, including making all investment decisions.
John Goode, an Investment Officer of the Manager, Chairman and Chief
Investment Officer of Davis Skaggs and Managing Director of Salomon
Smith Barney assists the Portfolio Manager.
30
<PAGE>
DISTRIBUTION
CFBDS, located at 21 Milk Street, Boston, MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such will conduct a
continuous offering pursuant to a "best efforts" arrangement requiring
CFBDS to take and pay for only such securities as may be sold to the public.
The Fund has adopted a plan of distribution under Rule 12b-1 under the 1940
Act (the "Plan"), pursuant to which Salomon Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Salomon Smith Barney is also paid an annual distribution fee with
respect to Class B and Class L shares at the annual rate of 0.75% of the aver-
age daily net assets attributable to those Classes. Class B shares which auto-
matically convert to Class A shares eight years after the date of original pur-
chase will no longer be subject to distribution fees. The fees are used by Sal-
omon Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class L shares, to cover expenses pri-
marily intended to result in the sale of those shares. These expenses include:
advertising; the cost of printing and mailing prospectuses to potential invest-
ors; payments to and expenses of Salomon 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 Salomon Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or
Salomon Smith Barney at the time of sale and, with respect to Class A,
Class B and Class L shares, a continuing fee for servicing shareholder
accounts for as long as a shareholder remains a holder of that Class.
Salomon Smith Barney Financial Con-
sultants 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 Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Fund'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 Salomon Smith Barney, amounts received
under the Plan and proceeds of the CDSC.
31
<PAGE>
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, L
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 desig-
nation 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 maters exclusively affecting a single Class;
(f) the exchange privi-
lege of each Class; and (g) the conversion feature of the Class B shares. The
Board of Directors does not anticipate that there will be any conflicts among
the interests of the holders of the different Classes. The Directors, on an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund'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 sharehold-
ers vote, shareholders of each Class will have one vote for each full share
owned and a proportionate, fractional share 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 Salomon Smith Barney Financial
Consultant or the Fund's Transfer Agent.
32
<PAGE>
APPENDIX A
Convertible Securities. Convertible securities are generally preferred secu-
rities or fixed-income securities that are convertible into common stock at
either a stated price or stated rate. The price of the convertible security
will normally vary in some proportion to changes in the price of the
underlying common stock because of this conversion feature.
A convertible security will normally also provide a fixed income stream.
For this reason, the convertible security may not decline in price as
rapidly as the underlying common stock. Convertible securities rank senior
to common stocks in an issuer's capital structure and consequently entail
less risk than the issuer's common stock. The Manager will select
convertible securities to
primarily upon its evaluation of the fundamental investment characteristics and
growth prospects of the issuer of the security. As a fixed income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. While convertible secu-
rities generally offer lower interest or dividend yields than non-convertible
fixed income securities of similar quality, their value tends to increase as
the market value of the underlying stock increases and to decrease when the
value of the underlying stock decreases.
Foreign Securities. In addition to direct investment in securities of
foreign issuers, the Fund may also invest in securities of foreign issuers
in the form of sponsored and unsponsored American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts
(GDRs) or other similar securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. The Fund also may
invest in securities denominated in
European Currency Units (ECUs). An ECU is a "basket" consisting of a speci-
fied amount of currencies of certain of the twelve member states of the Euro-
pean Community. In addition, the Fund may invest in securities denominated in
other currency "baskets."
There are certain risks involved in investing in securities of companies and
governments of foreign nations that are in addition to the usual risks
inherent in domestic investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic
developments and the pos-
sible imposition of currency exchange blockages or other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers and the lack of uniform accounting, auditing and financial reporting
standards or of other regulatory practices and requirements comparable to
those applicable to domestic companies. The yield of the Fund may be adversely
affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies
and their mar-
kets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with
A-1
<PAGE>
APPENDIX A (CONTINUED)
respect to certain foreign countries, there is the possibility of expropria-
tion, nationalization, confiscatory taxation and limitations on the use or
removal of funds or other assets of the Fund, including the withholding of div-
idends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund may invest in secu-
rities denominated or quoted in currencies other than the U.S. dollar, changes
in foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of con-
verting foreign currency to U.S. dollars, the payment of fixed brokerage com-
missions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign cus-
todians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Real Estate Investment Trusts ("REITS"). The Fund may invest in REITS, which
are pooled investment vehicles that invest primarily in either real estate or
real estate related loans. The value of a REIT is affected by changes in the
value of the properties owned by the REIT or securing mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate.
The Fund will indirectly bear its proportionate share of any expenses,
including manage-
ment fees, paid by a REIT in which it invests.
Debt Securities. Debt securities in which the Fund may invest include notes,
bills, commercial paper, obligations issued or guaranteed by the government or
any of its political subdivisions, agencies or instrumentalities, and
certificates of deposit. Debt securities represent money borrowed that
obligates the issuer (e.g., a corporation, municipality, government,
government agency) to repay the borrowed amount at maturity (when the
obligation is due and payable) and usually to pay the holder interest at
specific times.
All debt securities are subject to market risk and credit risk. Market risk
relates to market-induced changes in a security's value, usually as a
result of changes in interest rates. The value of the Fund's investments
in debt securi-
ties will change as the general levels of interest rates fluctuate. During
periods of falling interest rates, the value of the Fund's debt securities
will generally rise. Conversely, during periods of rising interest rates,
the value of the Fund's debt securities will generally decline.
Credit risk relates to the ability of the issuer to make payments of
principal and interest. The Fund has no restrictions with respect to the
maturities or duration of the debt securities it holds. The Fund's
investments in fixed income securities with longer terms to maturity or
greater duration are subject to greater volatility
than the Fund's shorter-term securities.
A-2
<PAGE>
APPENDIX A (CONTINUED)
Money Market Instruments. Short-term instruments in which the Fund
may invest include obligations of banks having at least $1 billion in assets
(including certificates of deposit, time deposits and bankers' acceptances
of domestic or foreign banks, domestic savings and loan associations and
similar institu-
tions); commercial paper rated no lower than A-2 by Standard & Poor's Ratings
Group or Prime-2 by Moody's Investors Service, Inc. or the equivalent from
another nationally recognized statistical rating organization or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
two highest rating categories; and repurchase agreements with respect to
any of the foregoing entered into with banks and non-bank dealers approved
by the
Company's Board of Directors.
U.S. Government Securities. The Fund may invest in U.S. Government securi-
ties. Generally, these securities include U.S. Treasury obligations and obliga-
tions issued or guaranteed by U.S. Government agencies, instrumentalities or
sponsored enterprises. U.S. Government securities also include Treasury
receipts and other stripped U.S. Government securities, where the interest and
principal components of stripped U.S. Government securities are traded indepen-
dently. The Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a pro-
portionate interest in underlying U.S. Treasury securities. A zero coupon secu-
rity pays no interest to its holder during its life and its value consists of
the difference between its face value at maturity and its cost. The market val-
ues of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically.
Repurchase Agreements. The Fund may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its
assets are otherwise subject to a stay order, the Fund's right to liquidate
the securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, the Fund has adopted certain
procedures intended to mini-
mize the risks of investing in repurchase agreements.
Reverse Repurchase Agreements. In order to generate additional income, the
Fund may engage in reverse repurchase agreement transactions with banks, bro-
ker-dealers and other financial intermediaries. Reverse repurchase agreements
are the same as repurchase agreements except that, in this instance, the Fund
would assume the role of seller/borrower in the transaction. The Fund will
maintain a segregated account consisting of assets determined to be liquid by
the Manager that at all times have a value equal to its obligations under
reverse repurchase agreements. The Fund will invest the proceeds in
other money market instruments or repurchase agreements maturing not later
than the expira-
tion of the reverse repur-
A-3
<PAGE>
APPENDIX A (CONTINUED)
chase agreement. Reverse repurchase agreements involve the risk that the mar-
ket value of the securities sold by the Fund may decline below the repurchase
price of the securities.
When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund
may purchase securities on a when-issued basis, may purchase and sell securi-
ties for delayed delivery and may make contracts to purchase securities for a
fixed price at a future date beyond normal settlement time (forward commit-
ments). When-issued transactions, delayed delivery purchases and forward com-
mitments involve a risk of loss if the value of the securities declines prior
to the settlement date, which risk is in addition to the risk of decline in
the value of the Fund's other assets. Typically, no income accrues on securi-
ties the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
deposited in a segregated account.
Lending of Securities. Consistent with applicable regulatory requirements
and for cash management purposes, the
Fund may lend portfolio securities to
entities deemed creditworthy by the Manager. Such loans will usually be made
to brokers, dealers and other financial organizations, and would be required
to be secured continuously by collateral in cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
the current market value of the loaned securities. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. 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 finan-
cially. Loans will be made to firms deemed by the Manager to be of good stand-
ing and will not be made unless, in the judgment of the
Manager the consideration
to be earned from such loans would justify the risk.
Options on Securities, Securities Indexes and Currencies. The Fund may write
(sell) covered put and call options on securities, securities indexes and cur-
rencies ("Options") and purchase put and call Options that are traded on for-
eign or U.S. securities exchanges and over the counter. The Fund will write
such Options for the purpose of increasing its return and/or protecting the
value of its portfolio. In particular, where the Fund writes an Option that
expires unexercised or is closed out by the Fund at a profit, it will retain
the premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been written or the increased cost of portfolio
securities to be acquired. However, the writing of Options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs. In
contrast, if the price of the security underlying the Option
A-4
<PAGE>
APPENDIX A (CONTINUED)
moves adversely to the Fund's position, the Option may be exercised and the
Fund will be required to purchase or sell the security at a disadvantageous
price, resulting in losses that may only be partially offset by the amount of
the premium. The Fund may also write combinations of put and call Options on
the same security, known as "straddles." Such transactions generate additional
premium income but also present increased risk.
The Fund may purchase put and call Options in anticipation of declines in
the value of portfolio securities or increases in the value of securities
to be acquired. In the event that the expected changes occur, the Fund may
be able to offset the resulting adverse effect on its portfolio, in whole or
in part, through the Options purchased. The risk assumed by the Fund in
connection with such transactions is limited to the amount of the premium
and related transac-
tion costs associated with the Option, although the Fund may be required to
forfeit such amounts in the event that the prices of securities underlying the
Options do not move in the direction or to the extent anticipated.
Over-the-counter options in which the Fund may invest differ from traded
options in that they are two-party contracts, with price and other terms nego-
tiated between buyer and seller, and generally do not have as much market
liquidity as exchange-traded options. The Fund may be required to treat as
illiquid over-the-counter options purchased and securities being used to cover
certain written over-the-counter options.
Futures Contracts and Options on Futures Contracts. The Fund may enter into
transactions in futures contracts and options on futures only
(i) for bona fide hedging 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
invest-
ment returns when a futures contract is priced more attractively than stocks
comprising 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.
A-5
<PAGE>
APPENDIX A (CONTINUED)
Among the several risks accompanying the utilization of futures contracts
and options on futures contracts are: First, the successful use of futures and
options is dependent upon the ability of the Manager to predict correctly move-
ments in the stock market or in the direction of interest rates. These predic-
tions 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 through a linked
exchange), and as a result of
daily price fluctuations limits there can be no assurance the offsetting trans-
action 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 incurring a loss in the event of adverse price movements.
A-6
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<PAGE>
SALOMON SMITH BARNEY
---------------------------------
A Member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
SMALL CAP
VALUE
FUND
388 Greenwich Street
New York, New York 10013
FD 12/98
PART B
Smith Barney
Small Cap Value Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Statement of Additional
Information
December 28, 1998
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectus of Smith
Barney Small Cap Value Fund (the "Fund") dated December 28, 1998, as
amended or supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The Fund is a series of Smith
Barney Investment Funds Inc. (the "Company"). The Fund's Prospectus may
be obtained from a Salomon Smith Barney Financial Consultant or by writing
or calling the Fund at the address or telephone number set forth above.
This SAI, although not in itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this SAI, except where shown below:
Management of the Fund 1
Investment Objective and Management Policies 4
Purchase of Shares 14
Redemption of Shares 15
Distributor 16
Valuation of Shares 17
Exchange Privilege 17
Performance Data (See in the Prospectus "Performance") 18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")
19
Additional Information 20
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are
the following:
CFBDS, Inc. ("CFBDS" or the "Distributor") Distributor
Mutual Management Corp. ("MMC" or the "Manager") Investment Manager
PNC Bank, National Association ("PNC" or the "Custodian")
Custodian
First Data Investor Services Group, Inc.,
("First Data" or the "Transfer Agent") Transfer Agent
These organizations and the functions they perform for the Fund is
discussed in the Prospectus and in this
SAI.
Directors and Executive Officers of the Fund
The Directors and executive officers of the Fund, 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 Fund, 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 65). Managing Director of Salomon Smith Barney Inc.
("Salomon Smith Barney") and formerly Chairman of the Board of Smith
Barney Strategy Advisers Inc. Mr. McLendon is a director of 58 investment
companies associated with Salomon Smith Barney Holdings Inc. His address
is 388 Greenwich Street, New York, New York 10013.
Jerome Miller, Director (Age 60). Retired, Former President, Asset
Management Group of Shearson Lehman Brothers. His address is 27 Hemlock
Road, Manhasset, New York, NY 11030.
Ken Miller, Director (Age 56). President of Young Stuff Apparel Group,
Inc. His address is 1411 Broadway, New York, New York 10018.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41). Managing
Director of Salomon Smith Barney, Chief Financial Officer of the Smith
Barney Mutual Funds; Director and Senior Vice President of MMC and TIA.
His address is 388 Greenwich Street, New York, New York 10013.
Peter Hable, Vice President and Investment Officer (Age 40). Managing
Director of Salomon Smith Barney and President of Davis Skaggs Investment
Management, a division of MMC. His address is One Sansome Street, 36th
Floor, San Francisco, California 94104.
John G. Goode, Investment Officer (Age 54). Managing Director of Salomon
Smith Barney. Chairman and Chief Investment Officer of Davis Skaggs
Investment Management, a division of MMC. His address is One Sansome
Street, 36th Floor, San Francisco, California 94104.
Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon Smith
Barney; General Counsel and Secretary of MMC and TIA. Her address is 388
Greenwich Street, New York, New York 10013.
No officer, director or employee of Salomon 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 ofSalomon Smith Barney or any of its
affiliates a fee of $22,500 per annum plus $2,900 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:
Name of Person
Aggregate
Compensation
from Fund
Total Pension
or Retirement
Benefits
Accrued as
part of Fund
Expenses
Compensation
from Fund and
Fund Complex
Paid to
Directors
Number of
Funds for
Which
Director
Serves Within
Fund Complex
Paul R. Ades
$0
$0
$49,000
5
Herbert Barg
0
0
101,600
16
Dwight B. Crane
0
0
133,850
22
Frank G. Hubbard
0
0
52,000
5
Heath B. McLendon
0
0
0
58
Jerome Miller
0
0
12,400
5
Ken Miller
0
0
52,000
5
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.
Investment Manager - MMC
MMC serves as investment manager to the Fund pursuant to an investment
management agreement (the "Investment Management Agreement") with the
Company which was approved by the Board of Directors, including a majority
of Directors who are not "interested persons" of the Company or the
Manager. The Manager is a wholly owned subsidiary of Salomon Smith Barney
Holdings Inc. ("Holdings"), which in turn, is a wholly owned subsidiary
of Citigroup Inc. ("Citigroup"). The services provided by the Manager
under the Investment Management Agreement are described in the prospectus
under "Management of the Company and the Fund." The Manager pays the
salary of any officer and employee who is employed by both it and the
Company. The Manager bears all expenses in connection with the performance
of its services.
As compensation for investment management services, the Fund pays the
Manager a fee computed daily and paid monthly at the annual rate of 0.75%
of the Fund's average daily net assets.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Company. The Directors
who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan LLP to serve as their legal counsel.
KPMG LLP, independent accountants, 345 Park Avenue, New York,
New York 10154, serve as auditors of the Company and will render an
opinion on the Company's financial statements annually beginning with the
fiscal period ending September 30, 1999.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve its objective. This section contains supplemental
information concerning the types of securities and other instruments in
which the Fund may invest, the investment policies and portfolio
strategies that the Fund may utilize and certain risks attendant to such
investments, policies and strategies.
Foreign Securities and American Depository Receipts
The Fund has the authority to invest up to 25% of its assets in foreign
securities (including European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs")) and American Depository Receipts ("ADRs")
or other securities representing underlying shares of foreign companies.
EDRs are receipts issued in Europe which evidence ownership of underlying
securities issued by a foreign corporations. ADRs are receipts typically
issued by an American bank or trust company which evidence a similar
ownership arrangement. Generally, ADRs which are issued in registered
form, are designed for use in the United States securities markets and
EDRs, which are issued in bearer form, are designed for use in European
securities markets. GDRs are tradeable both in the U.S. and Europe and are
designed for use throughout the world.
Investing in the securities of foreign companies involves special risks
and considerations not typically associated with investing in U.S.
companies. These include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S. investments in foreign
countries, and potential restrictions on the flow of international
capital. Additionally, foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater
price volatility. Many of the foreign securities held by the Fund will not
be registered with, nor will the issuers thereof be subject to the
reporting requirements of, the SEC. Accordingly, there may be less
publicly available information about the securities and about the foreign
company issuing them than is available about a domestic company and its
securities. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions. The Fund may invest in
securities of foreign governments (or agencies or subdivisions thereof),
and therefore many, if not all, of the foregoing considerations apply to
such investments as well.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements and for cash management
purposes, the Fund may lend securities from its portfolio to brokers,
dealers and other financial organizations. The Fund may not lend its
Portfolio securities to the Investment Adviser or the Administrator or
their affiliates unless they have applied for and received specific
authority from the SEC. Loans of portfolio securities by the Fund will be
collateralized by cash, letters of credit or U.S. government securities
that are maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
government securities are used as collateral. Requirements of the SEC,
which may be subject to future modifications, currently provide that the
following conditions must be met whenever the Fund's portfolio securities
are loaned: (a) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (b) the borrower must increase
such collateral
whenever the market value of the securities 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 any 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; however, if a
material event adversely affecting the investment occurs, the Company's
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 the Investment Adviser to be of good
standing and will not be made unless, in the judgment of the Investment
Adviser, the consideration to be earned from such loans would justify the
risk. From time to time, the Fund may return a part of the interest earned
from the investment of collateral received for securities loaned to: (a)
the borrower; and/or (b) a third party, which is unaffiliated with the
Fund, the Investment Adviser or Administrator and which is acting as a
"finder."
Reverse Repurchase Agreements
The Fund may enter into 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 and other
financial institutions. 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, reverse repurchase agreements may be
considered borrowing by the seller.
Reverse repurchase agreements create opportunities for increased returns
to the shareholders of the Fund but, at the same time, create special risk
considerations. Although the principal or stated value of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. To the extent the income or other gain derived
from securities purchased with borrowed funds exceeds the interest or
dividends the Fund will have to pay in respect thereof, the Fund's net
income or other gain will be greater than if this type of investment
technique had not been used. Conversely, if the income or other gain from
the incremental assets is not sufficient to cover this cost, the net
income or other gain of the Fund will be less than if the reverse
repurchase agreement had not been used.
The Fund currently intends to invest not more than 33% of its net assets
in reverse repurchase agreements.
When-Issued Securities and Delayed Delivery Transactions
In order to secure what the Manager considers to be an advantageous price
or yield, the Fund may purchase U.S. government securities on a
when-issued basis or purchase or sell U.S. government securities for
delayed delivery. The Fund will enter into such purchase transactions for
the purpose of acquiring portfolio securities and not for the purpose of
leverage. Delivery of the securities in such cases occurs beyond the
normal settlement periods, but no payment or delivery is made by the Fund
prior to the reciprocal delivery or payment by the other party to the
transaction. In entering into a when-issued or delayed-delivery
transaction, the Fund relies on the other party to consummate the
transaction and may be disadvantaged if the other party fails to do so.
U.S. government securities normally are subject to changes in value based
upon changes, real or anticipated, in the level of interest rates and, to
a lesser extent, the public's perception of the creditworthiness of the
issuers. In general, U.S. government securities tend to appreciate when
interest rates decline and depreciate when interest rates rise. Purchasing
U.S. government securities on a when-issued basis or delayed-delivery
basis, therefore, can involve the risk that the yields available in the
market when the delivery takes place may
actually be higher than those obtained in the transaction itself.
Similarly, the sale of U.S. government securities for delayed delivery can
involve the risk that the prices available in the market when the delivery
is made may actually be higher than those obtained in the transaction
itself.
A Fund will at times maintain in a segregated account at PNC cash or
liquid securities equal to the amount of the Fund's when-issued or
delayed-delivery commitments. For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued
at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of such
commitments by the Fund. Placing securities rather than cash in the
account may have a leveraging effect on the Fund's assets. That is, to the
extent that the Fund remains substantially fully invested in securities at
the time that it has committed to purchase securities on a when-issued
basis, there will be greater fluctuation in its net asset value than if it
had set aside cash to satisfy its purchase commitments. On the settlement
date, the Fund will meet its obligations from then available cash flow,
the sale of securities held in the separate account, the sale of other
securities or, although it normally would not expect to do so, from the
sale of the when-issued or delayed-delivery securities themselves (which
may have a greater or lesser value than the Fund's payment obligations).
Money Market Instruments
As stated in the Prospectus, the Fund may invest for temporary defensive
purposes in corporate and government bonds and notes and money market
instruments. Money market instruments in which the Fund may invest
include: U.S. government securities; certificates of deposit, time
deposits and bankers' acceptances issued by domestic banks (including
their branches located outside the United States and subsidiaries located
in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and
repurchase agreements with respect to the foregoing types of instruments.
The following is a more detailed description of such money market
instruments.
Certificates of deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers usually in connection with international transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System and to be insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. Most
state banks are insured by the FDIC (although such insurance may not be of
material benefit to the Fund, depending upon the principal amounts of CDs
of each bank held by the Fund) and are subject to Federal examination and
to a substantial body of Federal law and regulation. As a result of
governmental regulations, domestic branches of domestic banks are
generally required to, among other things, maintain specified levels of
reserves, and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs,
may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and
government regulation. Such obligations are subject to different risks
than are those of domestic banks or domestic branches of foreign banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal
and interest on the obligations, foreign exchange controls and foreign
withholding and other taxes on interest income. Foreign branches of
domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank than about a
domestic bank. CDs issued by wholly owned Canadian subsidiaries of
domestic banks are guaranteed as to repayment of principal and interest
(but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by governmental
regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic branch of a foreign bank with
assets in excess of $1 billion may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in
which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may or may not be
required to: (a) pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its assets equal to 5% of
its total liabilities; and (b) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a domestic branch of a foreign bank
than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches
of foreign banks, MMC will carefully evaluate such investments on a
case-by-case basis.
Savings and loan associations whose CDs may be purchased by the Fund are
supervised by the Office of Thrift Supervision and are insured by the
Savings Association Insurance Fund, which is administered by the FDIC and
is backed by the full faith and credit of the U.S. government. As a
result, such savings and loan associations are subject to regulation and
examination.
Options, Futures and Currency Strategies
The Fund may use forward currency contracts and certain options and
futures strategies to attempt to hedge its portfolio, i.e., reduce the
overall level of investment risk normally associated with the Fund. There
can be no assurance that such efforts will succeed.
In order to assure that the Fund will not be deemed to be a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the
Commodity Futures Trading Commission ("CFTC") require that the Fund
enter into transactions in futures contracts and options on futures only
(i) for bona fide hedging purposes (as defined in CFTC regulations), 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
liquidation value of the Fund's assets. To attempt to hedge against
adverse movements in exchange rates between currencies, the Fund may enter
into forward currency contracts for the purchase or sale of a specified
currency at a specified future date. Such contracts may involve the
purchase or sale of a foreign currency against the U.S. dollar or may
involve two foreign currencies. The Fund may enter into forward currency
contracts either with respect to specific transactions or with respect to
its portfolio positions. For example, when the investment adviser
anticipates making a purchase or sale of a security, it may enter into a
forward currency contract in order to set the rate (either relative to the
U.S. dollar or another currency) at which the currency exchange
transaction related to the purchase or sale will be made ("transaction
hedging"). Further, when the investment adviser believes that a
particular currency may decline compared to the U.S. dollar or another
currency, the Fund may enter into a forward contract to sell the currency
the investment adviser expects to decline in an amount approximating the
value of some or all of the Fund's securities denominated in that
currency, or when the investment adviser believes that one currency may
decline against a currency in which some or all of the portfolio
securities held by the Fund are denominated, it may enter into a forward
contract to buy the currency expected to decline for a fixed amount
("position hedging"). In this situation, the Fund may, in the
alternative, enter into a forward contract to sell a different currency
for a fixed amount of the currency expected to decline where the
investment manager believes that the value of the currency to be sold
pursuant to the forward contract will fall whenever there is a decline in
the value of the currency inwhich portfolio securities of the Fund are
denominated ("cross hedging"). The Fund's custodian places (i) cash,
(ii) U.S. Government securities or (iii) equity securities or debt
securities (of any grade) in certain currencies provided such assets are
liquid, unencumbered and marked to market daily, or other high-quality
debt securities denominated in certain currencies in a separate account of
the Fund having a value equal to the aggregate account of the Fund's
commitments under forward contracts entered into with respect to position
hedges and cross-hedges. If the value of the securities placed in a
separate account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the amount will equal the
amount of the Fund's commitments with respect to such contracts.
For hedging purposes, the Fund may write covered call options and purchase
put and call options on currencies to hedge against movements in exchange
rates and on debt securities to hedge against the risk of fluctuations in
the prices of securities held by the Fund or which the investment adviser
intends to include in its portfolio. The Fund also may use interest rates
futures contracts and options thereon to hedge against changes in the
general level in interest rates.
The Fund may write call options on securities and currencies only if they
are covered, and such options must remain covered so long as the Fund is
obligated as a writer. A call option written by the Fund is "covered" if
the Fund owns the securities or currency underlying the option or has an
absolute and immediate right to acquire that security or currency without
additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of
other securities or currencies held in its portfolio. A call option is
also covered if the Fund holds on a share-for-share basis a call on the
same security or holds a call on the same currency as the call written
where the exercise price of the call held is equal to less than the
exercise price of the call written or greater than the exercise price of
the call written if the difference is maintained by the Fund in cash,
Treasury bills or other high-grade, short-term obligations in a segregated
account with its custodian.
Although the portfolio might not employ the use of forward currency
contracts, options and futures, the use of any of these strategies would
involve certain investment risks and transaction costs to which it might
not otherwise be subject. These risks include: dependence on the
investment adviser's ability to predict movements in the prices of
individual debt securities, fluctuations in the general fixed-income
markets and movements in interest rates and currency markets, imperfect
correlation between movements in the price of currency, options, futures
contracts or options thereon and movements in the price of the currency or
security hedged or used for cover; the fact that skills and techniques
needed to trade options, futures contracts and options thereon or to use
forward currency contracts are different from those needed to select the
securities in which the Fund invests; lack of assurance that a liquid
market will exist for any particular option, futures contract or options
thereon at any particular time and possible need to defer or accelerate
closing out certain options, futures contracts and options thereon in
order to continue to qualify for the beneficial tax treatment afforded
"regulated investment companies" under the Internal Revenue Code of
1986, as amended (the "Code"). See "Dividends, Distributions and
Taxes."
Options on Securities
As discussed more generally above, the Fund may engage in the writing of
covered call options. The Fund may also purchase put options and enter
into closing transactions.
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life
of the option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price
of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The
writer of a covered put option accepts the risk of a decline in the price
of the underlying security. The size of the premiums the Fund may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing
activities.
Options written by the Fund will normally have expiration dates between
one and six months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities at the times the options are written. In the case of
call options, these exercise prices are referred to as "in-the-money,"
"at-the-money" and "out-of-the-money," respectively.
The Fund may write (a) in-the-money call options when MMC expects the
price of the underlying security to remain flat or decline moderately
during the option period, (b) at-the-money call options when MMC expects
the price of the underlying security to remain flat or advance moderately
during the option period and (c) out-of-the-money call options when MMC
expects that the price of the security may increase but not above a price
equal to the sum of the exercise price plus the premiums received from
writing the call option. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this
lower price, the amount of any realized loss will be offset wholly or in
part by the premium received. Out-of-the-money, at-the-money and
in-the-money put options (the reverse of call options as to the relation
of exercise price to market price) may be utilized in the same market
environments as such call options are used in equivalent transactions.
So long as the obligation of the Fund as the writer of an option
continues, the Fund may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring it to deliver,
in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Fund effects a closing purchase
transaction. The Fund can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice. To
secure its obligation to deliver the underlying security when it writes a
call option, or to pay for the underlying security when it writes a put
option, the Fund will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options
Clearing Corporation ("Clearing Corporation") or similar clearing
corporation and the securities exchange on which the option is written.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. The Fund expects to write
options only on national securities exchanges or in the over-the-counter
market. The Fund may purchase put options issued by the Clearing
Corporation or in the over-the-counter market.
A Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which a Fund has written an option, it will
realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur
a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when a Fund has
purchased an option and engages in a closing sale transaction, whether it
recognizes a profit or loss will depend upon whether the amount received
in the closing sale transaction is more or less than the premium the Fund
initially paid for the original option plus the related transaction costs.
Although the Fund generally will purchase or write only those options for
which MMC believes there is an active secondary market so as to facilitate
closing transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will
exist for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in
an option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, have at times rendered certain of the facilities of the
Clearing Corporation and national securities exchanges inadequate and
resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with
the timely execution of customers' orders, will not recur. In such event,
it might not be possible to effect closing transactions in particular
options. If, as a covered call option writer, the Fund is unable to effect
a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or
written, or exercised within certain periods, by an investor or group of
investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of MMC and certain of their
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these
limits, and it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of a Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stocks with respect to which the Fund
has written options may exceed the time within which a Fund must make
delivery in accordance with an exercise notice. In these instances, the
Fund may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, a Fund will not bear any
market risk because a Fund will have the absolute right to receive from
the issuer of the underlying security an equal number of shares to replace
the borrowed stock, but the Fund may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Although MMC will attempt to take appropriate measures to minimize the
risks relating to the Fund's writing of call options and purchasing of put
and call options, there can be no assurance that the Fund will succeed in
its option-writing program.
Stock Index Options
As described generally above, a Fund may purchase put and call options and
write call options on domestic stock indexes listed on domestic exchanges
in order to realize its investment objective of capital appreciation or
for the purpose of hedging its portfolio. A stock index fluctuates with
changes in the market values of the stocks included in the index. Some
stock index options are based on a broad market index such as the New York
Stock Exchange Composite Index or the Canadian Market Portfolio Index, or
a narrower market index such as the Standard & Poor's 100. Indexes also
are based on an industry or market segment such as the American Stock
Exchange Oil and Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the fixed
exercise price of the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on
the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the
stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the
option. The amount of cash received will be equal to such difference
between the closing price of the index and the exercise price of the
option expressed in dollars or a foreign currency, as the case may be,
times a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. The
writer may offset its position in stock index options prior to expiration
by entering into a closing transaction on an exchange or it may let the
option expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in
the portion of the securities portfolio of the Fund correlate with pric
movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase or writing of options on an index depends upon movements
in the level of stock prices in the stock market generally or, in the case
of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use
by the Fund of options on stock indexes will be subject to MMC's ability
to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Futures Contracts and Options on Futures Contracts
As described generally above, the Fund may invest in stock index futures
contracts and options on futures contracts that are traded on a domestic
exchange or board of trade.
The purpose of entering into a futures contract by a Fund is to protect
the Fund from fluctuations in the value of securities without actually
buying or selling the securities. For example, in the case of stock index
futures contracts, if a Fund anticipates an increase in the price of
stocks that it intends to purchase at a later time, the Fund could enter
into contracts to purchase the stock index (known as taking a "long"
position) as a temporary substitute for the purchase of stocks. If an
increase in the market occurs that influences the stock index as
anticipated, the value of the futures contracts increases and thereby
serves as a hedge against a Fund's not participating in a market advance.
A Fund then may close out the futures contracts by entering into
offsetting futures contracts to sell the stock index (known as taking a
"short" position) as it purchases individual stocks. The Fund can
accomplish similar results by buying securities with long maturities and
selling securities with short maturities. But by using futures contracts
as an investment tool to reduce risk, given the greater liquidity in the
futures market, it may be possible to accomplish the same result more
easily and more quickly.
No consideration will be paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, a Fund will be required to deposit
with the broker an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange or board of trade on which the contract is traded
and brokers or members of such board of trade may charge a higher amount).
This amount is known as "initial margin" and 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, known as
"variation margin," to and from the broker, will be made daily as the
price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." In
addition, when a Fund enters into a long position in a futures contract or
an option on a futures contract, it must deposit into a segregated account
with a Fund's custodian an amount of cash or cash equivalents equal to the
total market value of the underlying futures contract, less amounts held
in the Fund's commodity brokerage account at its broker. At any time prior
to the expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to terminate
the Fund's existing position in the contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by the Fund is
subject to 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. In addition, there can be no
assurance that there will be a perfect correlation between movements in
the price of the securities underlying the futures contract and movements
in the price of the securities that are the subject of the hedge. A
decision of whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected trends in market behavior
or interest rates.
Positions in futures contracts may be closed out only on the exchange on
which they were entered into (or through a linked exchange) and no
secondary market exists for those contracts. In addition, although the
Fund intends to enter into futures contracts only if there is an active
market for the contracts, there is no assurance that an active market will
exist for the contracts at any particular time. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a
price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event,
and in the event of adverse price movements, the Fund would be required to
make daily cash payments of variation margin; in such circumstances, an
increase in the value of the portion of the portfolio being hedged, if
any, may partially or completely offset losses on the futures contract. As
described above, however, no assurance can be given that the price of the
securities being hedged will correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures
contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions I through 7 below cannot be
changed without approval by the holders of a majority of the outstanding
shares of a Fund, defined as the lesser of (a) 67% or more of a Fund's
shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (b) more than 50%
of a Fund's outstanding shares. The remaining restrictions may be changed
by the Fund's Board of Directors at any time. In accordance with these
restrictions, the Fund will not:
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. 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.
3. 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 instumentalities) and securities of
state or municipal governments and their political subdivisions are not
considered to be issued by members of any industry.
4. 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 1/3% 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.
5. Make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Fund may invest consistent with its
investment objective and policies; (b) repurchase agreements; and (c)
loans of its portfolio securities, to the fullest extent permitted under
the 1940 Act.
6. Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to
be an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities.
7. 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 Fund's investment
objective and policies); or (d) investing in real estate investment trust
securities.
8. 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.
9. Invest in oil, gas or other mineral exploration or development
programs.
10. 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.
11. Invest for the purpose of exercising control over or management
of the issuer.
12. 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).
If any percentage restriction described above is complied with at the time
of an investment, a later increase or decrease in percentage resulting
from a change in values or assets will not constitute a violation of such
restriction.
Portfolio Turnover
While the Fund's portfolio turnover rate (the lesser of purchases or sales
of portfolio securities during the year, excluding purchases or sales of
short-term securities, divided by the monthly average value of portfolio
securities) is generally not expected to exceed 150%. The rate of turnover
will not be a limiting factor, however, when the Fund deems it desirable
to sell or purchase securities. This policy should not result in higher
brokerage commissions to the Fund, as purchases and sales of portfolio
securities are usually effected as principal transactions. Securities may
be sold in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another security of
comparable quality purchased at approximately the same time to take
advantage of what the Fund believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates,
such as changes in the overall demand for, or supply of, various types of
tax-exempt securities.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by the Manager,
subject to the overall review of the Company's Board of Directors.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Manager, investments of the
type that the Fund may make also may be made by those other accounts. When
the Fund and one or more other accounts managed by the Manager are
prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a
manner believed by the Manager to be equitable to each. 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.
Allocation of transactions on behalf of the Fund, including their
frequency, to various dealers is determined by the Manager in its best
judgment and in a manner deemed fair and reasonable to the Fund's
shareholders. The primary considerations of the Manager in allocating
transactions are availability of the desired security and the prompt
execution of orders in an effective manner at the most favorable prices.
Subject to these considerations, dealers that provide supplemental
investment research and statistical or other services to the Manager may
receive orders for portfolio transactions by a Fund. Information so
received is in addition to, and not in lieu of, services required to be
performed by the Manager, and the fees of the Manager are not reduced as a
consequence of their receipt of the supplemental information. The
information may be useful to the Manager in serving both the Fund and
other clients, and conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Manager in
carrying out its obligations to the Fund.
The Fund will not purchase securities during the existence of any
underwriting or selling group relating to the securities, of which the
Manager is a member, except to the extent permitted by the SEC. Under
certain circumstances, the Fund may be at a disadvantage because of this
limitation in comparison with other funds that have similar investment
objectives but that are not subject to a similar limitation.
Even though investment decisions for the Fund are made independently from
those of the other accounts managed by the Investment Adviser, investments
of the kind made by the Fund also may be made by those other accounts.
When the Fund and one or more accounts managed by the Investment Adviser
are prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a
manner believed by the Investment Adviser to be equitable. In some cases,
this procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained for or disposed of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges described in the Prospectus apply to
purchases of shares of a Fund made by any "purchaser," which term 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 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; or (f)
any other organized group of persons, provided that the organization has
been in existence for at least six months and was organized for a purpose
other than the purchase of investment company securities at a discount.
Purchasers who wish to combine purchase orders to take advantage of volume
discounts should contact aSalomon Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedules in the Prospectus,
apply to any purchase of shares of a Fund by any "purchaser" (as defined
above). The reduced sales charge is subject to confirmation of the
shareholder's holdings through a check of appropriate records. The Company
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 aSalomon Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of a 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 L share includes a 1.00 % initial
sales charge. Class A share purchases, including applicable rights 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") is
imposed on certain redemptions of Class L shares, and Class A shares when
purchased in amounts exceeding $500,000. The method of computation of the
public offering price is shown in the Fund's financial statements,
incorporated by reference in their entirety into this SAI.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is included in the
Prospectus. The right of redemption of shares of the Fund may be suspended
or the date of payment postponed (a) for any periods during which the New
York Stock Exchange, Inc. (the "NYSE") is closed (other than for
customary weekend and holiday closings), (b) when trading in the markets
the Fund normally utilizes is restricted, or an emergency exists, as
determined by the SEC, so that disposal of the Fund's investments or
determination of its net asset value is not reasonably practicable or (c)
for any 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 to make a
redemption payment wholly in cash, the Fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of $250,000
or 1.00% 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 the Fund as may be
necessary to cover the stipulated withdrawal payment. To the extent
withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments
will reduce the shareholder's investment and ultimately may 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 he
or she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not 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 reinvested
automatically at net asset value in additional shares of the Fund.
Withdrawal Plans should be set up with aSalomon Smith Barney Financial
Consultant. 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 Financial
Consultant.
DISTRIBUTOR
CFBDS serves as the Company's distributor on a best efforts basis pursuant
to a written agreement (the Distribution Agreement"), which was approved
by the Company's Board of Directors.
Distribution Arrangements
To compensateSalomon Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule l2b-1 under
the 1940 Act. Under the Plan, the Fund pays Salomon Smith Barney a service
fee, accrued daily and paid monthly, calculated at the annual rate of
0.25% of the value of the Fund's average daily net assets attributable to
the Class A, Class B and Class L shares. In addition, the Fund pays
Salomon Smith Barney a distribution fee with respect to the Class B and
Class L shares primarily intended to compensateSalomon Smith Barney for
its initial expense of paying Financial Consultants a commission upon
sales of those shares. The Class B and Class L distribution fee is
calculated at the annual rate of 0.75% of the value of the Fund's average
daily net assets attributable to the shares of the respective Class.
VALUATION OF SHARES
The net asset value per share of the Fund's Classes 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, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the differences in distribution fees and
Class-specific expenses, the per share net asset value of each Class may
differ. The following is a description of the procedures used by the
Company in valuing its assets.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in
the absence of sales, at the mean between the closing bid and asked
prices. Over-the-counter securities will be valued at the mean between the
closing bid and asked prices on each day, or, if market quotations for
those securities are not readily available, at fair value, as determined
in good faith by the Fund's Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
Amortized cost involves valuing an instrument at its original cost to the
Fund and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the instrument. All other securities and
other assets of the Fund will be valued at fair value as determined in
good faith by the Fund's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below and in the Prospectus, shareholders of any of the
Smith Barney Mutual Funds may exchange all or part of their shares for
shares of the same class of other Smith Barney Mutual Funds, to the extent
such shares are offered for sale in the shareholder's state of residence,
on the basis of relative net asset value per share at the time of exchange
as follows:
A. Class A and Class Y shares of the Fund may be exchanged without a
sales charge for the respective shares of any of the Smith Barney
Mutual Funds.
B. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares of
another Smith Barney Mutual Fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of calculating
CDSC rates and conversion periods, will be deemed to have been held
since the date the shares being exchanged were deemed to be
purchased.
C. Class L shares of any fund may be exchanged without a sales
charge. For purposes of CDSC applicability, Class L shares of the
Fund exchanged for Class L shares of another Smith Barney Mutual
Fund will be deemed to have been owned 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 Salomon Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current
net asset value and the proceeds are immediately invested, at a price as
described
above, in shares of the fund being acquired.Salomon 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, the Company may quote a Fund's yield or total return in
advertisements or in reports and other communications to shareholders. The
Company 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 any Class it will also disclose such
information for the other Classes.
Average Annual Total Return
"Average annual total return" figures 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.
Performance will vary from time to time depending on market conditions,
the composition of the Fund's portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the
future. Because performance will vary, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not intended
as a substitute for individual tax advice and investors are urged to
consult their own tax advisors as to the tax consequences of an investment
in the Fund.
The Company intends to qualify each year as a regulated investment company
under the Code. If the Fund (a) qualifies as a regulated investment
company and (b) distributes to its shareholders at least 90% of its net
investment income (including, for this purpose, its net realized
short-term capital gains), the Fund will not be liable for Federal income
taxes to the extent that its net investment income and its net realized
long- and short term capital gains, if any, are distributed to its
shareholders.
As described above, the Fund may invest in futures contracts and options
on futures contracts that are traded on a U.S. exchange or board of trade.
As a general rule, these investment activities will increase or decrease
the amount of long-term and short-term capital gains or losses realized by
the Fund and, thus, will affect the amount of capital gains distributed to
the Fund's shareholder.
For federal income tax purposes, gain or loss on the futures and options
described above (collectively referred to as "Section 1256 Contracts")
would, as a general rule, be taxed pursuant to a special "mark-to-market
system." Under the mark-to-market system, the Fund may be treated as
realizing a greater or lesser amount of gains or losses than actually
realized. As a general rule, gain or loss on Section 1256 Contracts is
treated as 60% long-term capital gain or loss and 40% short-term capital
gain or loss, and as a result, the mark-to market will generally affect
the amount of capital gains or losses taxable to the Fund and the amount
of distributions taxable to a shareholder. Moreover, if the Fund invests
in both Section 1256 and offsetting positions in those contracts, then the
Fund may not be able to receive the benefit of certain realized losses for
an indeterminate period of time. The Fund expects that its activities with
respect to Section 1256 Contracts and offsetting position in those
Contracts (1) will not cause it or its shareholders to be treated as
receiving a materially greater amount of capital gains or distributions
than actually realized or received and (2) will permit it to use
substantially all of its losses for the fiscal years in which the losses
actually occur.
Gains or losses on the sales of stock or securities by the Fund generally
will be long-term capital gains or losses if a Fund has held the stock or
securities for more than one year. Gains or losses on sales of stock or
securities held for not more than one year generally will be short-term
capital gains or losses.
Foreign countries may impose withholding and other taxes on dividends and
interest paid to the Fund with respect to investments in foreign
securities. However, certain foreign countries have entered into tax
conventions with the United States to reduce or eliminate such taxes.
Distributions of long-term capital gains will be taxable to shareholders
as such, whether paid in cash or reinvested in additional shares and
regardless of the length of time that the shareholder has held his or her
interest in the Fund. If a shareholder receives a distribution taxable as
long-term capital gain with respect to his or her investment in the Fund
and redeems or exchanges the shares before he or she has held them for
more than six months, any loss on the redemption or exchange that is less
than or equal to the amount of the distribution will be treated as a
long-term capital loss.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital
gain dividends") will be taxable to shareholders as long-term capital
gains, regardless of how long a shareholder has held Fund shares, and will
be designated as capital gain dividends in a written notice mailed by the
Fund to shareholders after the close of the Fund's prior taxable year. If
a shareholder receives a capital gain dividend with respect to any share
and if the share has been held by the shareholder for six months or less,
then any loss on the sale or exchange of such share will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or distribution
payment, any such payment will be a taxable dividend or distribution
payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails fully to report dividend and 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 "backup withholding," then
the shareholder may be subject to a 31% backup withholding tax with
respect to (a) any taxable dividends and distributions and (b) the
proceeds of any redemptions of Fund 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 is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult
their tax advisors with specific reference to their own tax situations,
including their state and local tax liabilities.
ADDITIONAL INFORMATION
The Company was incorporated on September 29, 1981 under the name Hutton
Investment Series Inc. The Company's corporate name was changed on
December 29, 1988, July 30, 1993 and October 28, 1994,
to SLH Investment Portfolios Inc., Smith Barney Shearson Investment Funds
Inc., and Smith Barney Investment Funds, Inc., respectively.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund. Under its agreement with the
Company on behalf of the Fund, PNC Bank holds the Fund's 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 securities transaction
charges. The assets of the Fund 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. Under the transfer agency agreement,
First Data maintains the shareholder account records for the Company,
handles certain communications between shareholders and the Company and
distributes dividends and distributions payable by the Company. For these
services, First Data receives a monthly fee computed on the basis of the
number of shareholder accounts it maintains for the Company during the
month and is reimbursed for out-of-pocket expenses.
Smith Barney
Small Cap Value Fund
Statement of
Additional Information
December 28, 1998
Smith Barney
Small Cap Value Fund
388 Greenwich Street
New York, New York 100 13
SALOMON SMITH BARNEY
A Member of Citigroup
U:\LEGAL\FUNDS\SLIV\1998\SECDOCS\SCVFSAIe.doc
PART C - OTHER INFORMATION
Item 23. Exhibits
All references are to the Registrant's registration
statement on Form N-1A (the "Registration Statement")
as filed with the SEC on October 2, 1981(File Nos. 2-
74288 and 811-3275).
(a) Articles of Restatement dated September 17, 1993
to Registrant's Articles of Incorporation dated
September 28, 1981, Articles of Amendment dated
October 14, 1994, Articles Supplementary, Articles of
Amendment dated October 14, 1994, Articles
Supplementary, Articles of Amendments and Certificates
of Correction dated November 7, 1994, are incorporated
by reference to Post-Effective Amendment No. 37 to the
Registration Statement filed on November 7, 1994.
Articles of Amendment dated October 23, 1997 are
incorporated by reference to Post-Effective Amendment
No. 46 dated October 23, 1997("Post-Effective
Amendment No.46"). Articles of Amendment dated
February 27, 1998 are incorporated by reference
to Post-Effective Amendment No. 48 dated April 29, 1998.
Articles of Amendment dated June 1, 1998 are incorporated
by reference to Post-Effective Amendment No. 49.
(b) Registrant's By-Laws, as amended on September 30,
1992 are incorporated by reference to Post-Effective
Amendment No. 30 to the Registration Statement filed
on April 30, 1993.
(c) Registrant's form of stock certificate for Smith
Barney Hansberger Global Value Fund ("Global Value
Fund") and Smith Barney Hansberger Global Value Small
Cap Fund ("Small Cap Fund") is incorporated by
reference to Post Effective Amendment 46.
(d)(1) Investment Advisory Agreement dated July 30,
1993, between the Registrant on behalf of Smith Barney
Investment Grade Bond Fund, Smith Barney Government
Securities Fund and Smith Barney Special Equities
Fund and Greenwich Street Advisors is incorporated by
reference to the Registration Statement filed on Form
N-14 on September 2, 1993, File No. 33-50153.
(d)(2) Investment Advisory Agreements on behalf of
Smith Barney Growth Opportunity Fund and Smith Barney
Managed Growth Fund is incorporated by reference to
Post-Effective Amendment No. 40 filed on June 27,
1995.
(d)(3) Investment Management Agreements on behalf of
Global Value Fund and Global Small Cap Fund between
Registrant and Smith Barney Mutual Funds Management
Inc. is incorporated by reference to Post-Effective
Amendment No. 46.
(d)(4) Sub-Advisory Agreement on behalf of Global
Value Fund and Global Small Cap Fund between MMC and
Hansberger Global Investors Inc. is
incorporated by reference to Post-Effective
Amendment No. 46.
(d)(5)Investment Management Agreements on behalf of
Smith Barney Small Cap Growth Fund and Smith Barney
Small Cap Value Fund between Registrant and
Mutual Management Corp. is incorporated by reference
To Post-Effective Amendment No. 49.
(e)(1) Distribution Agreement dated July 30, 1993,
between the Registrant and Smith Barney Shearson Inc.
is incorporated by reference to the registration
statement filed on Form N-14 on September 2, 1993.
File 33-50153.
(e)(2) Form of Distribution Agreement between the
Registrant and PFS Distributors on behalf of Smith
Barney Investment Funds Inc. is incorporated by
reference to Post-Effective Amendment No. 40 filed on
June 27, 1995.
(e)(3) Form of Distribution Agreement between the
Registrant and CFBDS, Inc. is incorporated by reference
To Post-Effective Amendment No. 49.
(f) Not Applicable.
(g)(1) Custodian Agreement with PNC Bank, National
Association is incorporated by reference to Post -
Effective Amendment No. 44 filed on April 29, 1997.
(g)(2) Custodian Agreement with Chase Manhattan Bank
is incorporated by reference to Post-Effective
Amendment No. 46.
(h)(1) Transfer Agency and Registrar Agreement dated
August 5, 1993 with First Data Investor Services
Group, Inc. (formerly The Shareholder Services Group,
Inc.) is incorporated by reference to Post-Effective
Amendment No. 31 as filed on December 22, 1993 (Post-
Effective Amendment No. 31").
(h)(2)Sub-Transfer Agency Agreement between the
Registrant and PFS Shareholders Services on behalf of
Smith Barney Investment Funds Inc. is incorporated by
reference to Post-Effective Amendment No. 40 filed on
June 27, 1995.
(i) Opinion of Robert A. Vegliante, Deputy General
Counsel of Smith Barney Mutual Funds Management Inc.
filed with the Registrant's rule 24-f2 Notice
(Accession No. 000091155-97-000104) is incorporated by
reference.
(j) To be filed by amendment.
(k) Not Applicable
(l) Not Applicable
(m)(1) Amended Services and Distribution Plans
pursuant to Rule 12b-1 between the Registrant on behalf
of Smith Barney Investment Grade Bond Fund, Smith
Barney Government Securities Fund, Smith Barney Special
Equities Fund and Smith Barney European Fund and Smith
Barney, Inc. ("Smith Barney") are incorporated by
reference to Post-Effective Amendment No. 37'
(m)(2) Form of Services and Distribution Plans
pursuant to Rule 12b-1 between the Registrant on
behalf of Smith Barney Growth Opportunity Fund and
Smith Barney Managed Growth Fund is incorporated by
reference to Post-Effective Amendment No. 40 filed on
June 27, 1995.
(m)(3) Form of Services and Distribution Plans
pursuant to Rule 12b-1 between the Registrant on
behalf of the Global Value Fund and Small Cap Fund is
incorporated by reference to Post-Effective Amendment
No. 46.
(m)(4) Form of Amended and Restated Shareholder Services and
Distribution Plan pursuant to Rule 12b-1 between
the Registrant on behalf of each of its series
is incorporated by reference to Post-Effective Amendment
No. 49.
(n) Not Applicable.
(o) Form of Plan pursuant to Rule 18f-3 is incorporated by
reference to Post-Effective Amendment No.50 to
Registration Statement.
Item 24.
None.
Item 25. Indemnification
The response to this item is incorporated by
reference to Pre-Effective Amendment No. 1 to the
registration statement filed on Form N-14 on October
8, 1993 (File No. 33-50153).
Item 26. Business and Other Connections of
Investment Adviser
Investment Adviser -Mutual Management Corp.("MMC")
formerly Smith Barney Mutual Funds Management Inc.
MMC was incorporated in December 1968 under the laws
of the State of Delaware. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings")(formerly known as Smith Barney Holdings
Inc.), which in turn is a wholly owned subsidiary of
Citigroup Inc. MMC is registered as an
investment adviser under the Investment Advisers Act
of 1940 (the "Advisers Act").The list required by this
Item 28 of officers and directors of MMC together with
information as to any other business, profession,
vocation or employment of a substantial nature engaged
in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and
D of FORM ADV filed by MMC pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 27. Principal Underwriters
(a) CFBDS, Inc. the Registrant's Distributor, is also
the distributor for
CitiFundsSM International Growth & Income Portfolio,
CitiFundsSM International Equity Portfolio, CitiFundsSM Large Cap
Growth
Portfolio, CitiFundsSM Intermediate Income Portfolio,
CitiFundsSM Short-Term U.S. Government Income Portfolio,
CitiFundsSM Emerging Asian Markets Equity Portfolio,
CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves,
CitiFundsSM Premium U.S. Treasury Reserves,
CitiFundsSM Premium Liquid Reserves, CitiFundsSM Institutional U.S.
Treasury Reserves, CitiFundsSM Institutional Liquid Reserves,
SM Institutional Cash Reserves, CitiFundsSM Tax Free Reserves,
CitiFundsSM Institutional Tax Free Reserves,
CitiFundsSM California Tax Free Reserves,
CitiFundsSM Connecticut Tax Free Reserves,
CitiFundsSM New York Tax Free Reserves, CitiFundsSM Balanced Portfolio,
CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth & Income
Portfolio,
CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM National
Tax Free Income Portfolio, CitiFundsSM New York Tax Free Income
Portfolio,
CitiSelect VIP Folio 200, Citiselect VIP Folio 300,
CitiSelect (VIP Folio 400, CitiSelect (VIP Folio 500,
CitiFundsSM Small Cap Growth VIP Portfolio, CitiSelect (Folio 200,
CitiSelect (Folio 300, CitiSelect (Folio 400, and CitiSelect (Folio
500.
CFBDS is also the placement agent for Large Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio,
Intermediate Income Portfolio, Short-Term Portfolio,
Growth & Income Portfolio, Large Cap Growth Portfolio,
Small Cap Growth Portfolio, International Equity Portfolio,
Balanced Portfolio, Government Income Portfolio, Emerging
Asian Markets Equity Portfolio, Tax Free Reserves Portfolio,
Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio.
CFBDS, Inc. is also the distributor for the following
Smith Barney Mutual Fund registrants:
Concert Investment Series
Consulting Group Capital Markets Funds
Greenwich Street Series Fund
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Travelers Series Fund Inc.
And various series of unit investment trusts.
CFBDS, Inc. is also the distributor for the following
Salomon Brothers funds;
Salomon Brothers Opportunity Fund Inc
Salomon Brothers Investors Fund Inc
Salomon Brothers Capital Fund Inc
Salomon Brothers Series Funds Inc
Salomon Brothers Institutional Series Funds Inc
Salomon Brothers Variable Series Funds Inc
The information required by this Item 29 with respect
to each director, officer and partner of CFBDS, Inc.
is incorporated by reference to Schedule A of Form BD
filed by CFBDS, Inc. pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-32417).
Item 28. Location of Accounts and Records
(1) Smith Barney Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(2) Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA
(4) The Chase Manhattan Bank
Chase Metrotech Center
Brooklyn, New York 11245
(5) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(6) CFBDS Inc.
21 Milk Street, 5th floor
Boston, Massachusetts 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of
1940, as amended, the Registrant, SMITH BARNEY
INVESTMENT FUNDS INC., has duly caused this Amendment
to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized,
all in the City of New York, State of New York on the
23rd day of December, 1998.
SMITH BARNEY INVESTMENT FUNDS INC.
By: /s/ Heath B. McLendon*
Heath B. McLendon
Chief Executive Officer
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities
Act of 1933, as amended, this Post-Effective Amendment
to the Registration Statement has been signed below by
the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board 12/23/98
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President
Lewis E. Daidone and Treasurer 12/23/98
(Chief Financial
and Accounting Officer)
/s/ Paul R. Ades * Director 12/23/98
Paul R. Ades
/s/ Herbert Barg* Director 12/23/98
Herbert Barg
/s/ Dwight B. Crane* Director 12/23/98
Dwight B. Crane
/s/ Frank Hubbard* Director 12/23/98
Frank Hubbard
/s/ Jerome Miller** Director 12/23/98
Jerome Miller
/s/ Ken Miller* Director 12/23/98
Ken Miller
*Signed by Heath B. McLendon, their duly authorized
attorney-in-fact, pursuant
to power of attorney dated November 3, 1994.
**Signed by Heath B. McLendon, their duly authorized
attorney-in-fact, pursuant
to power of attorney dated April 15, 1998.
/s/ Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibit
