As filed with the Securities and Exchange Commission on February 27, 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. 47
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940,
Amendment No. 49
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)
_____ On (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a) (1)
X On April 30, 1998 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a) (2)
_____ 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 INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents
Front Cover
Contents Page
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-1A CROSS REFERENCE SHEET
PURSUANT TO RULE 485(a) Under the Securities Act of 1933, as amended
Part A
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Highlights Financial Highlights Information
4. General Description of Registrant Cover Page;
Prospectus Summary
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund Management of the Fund and the Company;
Distributor; Additional Information;
Annual Report
6. Capital Stock and Other Investment Objective and
Securities Management Policies; Dividends,
Distributions and Taxes; Additional Information
7. Purchase of Securities Being Offered Valuation of Shares; Purchase of
Shares;
Exchange Privilege; Redemption of Shares;
Minimum Account Size; Distributor; Additional
Information
8 Redemption or Purchase of Shares; Redemption of Shares; Exchange
Privilege
9. Pending Legal Proceedings Not Applicable
Part B
Item No. and Caption Statement of Additional Information Caption
10 Cover Page Cover page
11. Table of Contents Contents
12. General Information and History Distributor; Additional Information
13. Investment Objectives and Policies Investment Objectives Management and
Policies
14. Management of the Fund Management of the Company; Distributor
15. Control Persons and Principal Management of the Company
Holders of Securities
16. Investment Advisory and Other Management of the Company;
Services Distributor
17. Brokerage Allocation and Investment Objective and
Other Services Management Policies; Distributor
18. Capital Stock and Other Investment Objective and
Securities Management Policies; Purchase of Shares;
Redemption of Shares; Taxes
19. Purchase, Redemption and Purchase of Shares; Redemption
Pricing of Securities Being Offered Purchase of Shares;
Redemption of Shares;
Valuation of Shares; Distributor; Exchange
Privilege
20. Tax Status Taxes
21. Underwriters see Prospectus "Purchase of Shares"
22. Calculations of Performance Performance Data
23. Financial Statements Financial Statements
SMITH BARNEY INVESTMENT FUNDS
PART A
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing in your future.
Every day.
<PAGE>
PROSPECTUS April 30, 1997
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation in a diversified portfolio of common stocks or securities con-
vertible into or exchangeable for common stocks, primarily of growth companies
as identified by the Fund's investment adviser.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). The Company is an open-end management investment company commonly
referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference. Shares of other funds offered by the Company
are described in separate Prospectuses that may be obtained by calling the
Company at the telephone number set forth above or by contacting a Smith Bar-
ney Financial Consultant.
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 30, 1997 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Company at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
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FINANCIAL HIGHLIGHTS 9
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
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VALUATION OF SHARES 17
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DIVIDENDS, DISTRIBUTIONS AND TAXES 18
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PURCHASE OF SHARES 19
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EXCHANGE PRIVILEGE 29
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REDEMPTION OF SHARES 32
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MINIMUM ACCOUNT SIZE 34
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PERFORMANCE 34
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MANAGEMENT OF THE COMPANY AND FUND 35
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DISTRIBUTOR 36
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ADDITIONAL INFORMATION 37
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</TABLE>
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
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2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks long-term capital appreciation by investing in equity
securities consisting of common stocks or securities which are convertible
into or exchangeable for such stocks, including warrants, which the investment
adviser believes to have superior appreciation potential. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of the sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$5,000,000. In addition, a fifth class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to tax-exempt employee
benefit and retirement plans of Smith Barney Inc. ("Smith Barney") and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain
redemptions. Class B shares are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.75% of the average daily net assets of the
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares no longer will be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
been acquired through the reinvestment of dividends and distributions ("Class
B Dividend Shares") will be converted at that time. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares which, when com-
bined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
investment alternative, Class B and Class C shares are sold without any ini-
tial sales charge so the entire purchase price is immediately invested in the
Fund. Any investment return on these additional invested amounts may partially
or wholly offset the higher annual expenses of these Classes. Because the
Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
subject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The $500,000 investment may be met by adding the purchase to the net asset
value of all Class A shares held in other funds sponsored by Smith Barney Inc.
("Smith Barney") listed under "Exchange Privilege." Class A share purchases may
also be eligible for a reduced initial sales charge. See "Purchase of Shares."
Because the ongoing expenses of Class A shares may be lower than those for
Class B and Class C shares, purchasers eligible to purchase Class A shares at
net asset value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Company and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See "Pur-
chase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund made
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes of shares is $25. The minimum investment requirements for pur-
chases of Fund shares through the Systematic Investment Plan are described
below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes for shareholders purchasing shares through
the Systematic Investment Plan on a monthly basis is $25 and on a quarterly
basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. See "Management of the Company and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
will become eligible for conversion to Class A shares on a pro rata basis. See
"Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after
a short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The Fund
may employ investment techniques which involve certain risks, including enter-
ing into repurchase agreements, lending portfolio securities, investing in
restricted securities, selling securities short and investing in foreign secu-
rities through the use of American Depositary Receipts. See "Investment Objec-
tive and Management Policies--Additional Investments."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
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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 None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds whichever is
lower) None* 5.00% 1.00% None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25% 1.00% 1.00% None
Other expenses 0.17% 0.16% 0.15% 0.07%
- -------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.17% 1.91% 1.90% 0.82%
- -------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the program. For more information, please
call your Smith Barney Financial Consultant.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class C and certain Class A shares, the length of time
the shares are held and whether shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption
of Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B and Class C shares, an annual 12b-1 fee of
1.00% of the value of average daily net assets of the respective Class, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees,
legal and accounting fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understand-
ing the various costs that an investor in the Fund will bear directly or indi-
rectly. The example assumes payment by the Fund of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A................................. $61 $85 $111 $185
Class B................................. 69 90 113 204
Class C................................. 29 60 103 222
Class Y................................. 8 26 46 101
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. 61 85 111 185
Class B................................. 19 60 103 204
Class C................................. 19 60 103 222
Class Y................................. 8 26 46 101
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</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two year period ended December 31, 1996 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The fol-
lowing information for the fiscal years ended December 31, 1986 through Decem-
ber 31, 1994 has been audited by other independent auditors. The information
set out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's Annual Report, which is incorpo-
rated by reference into the Statement of Additional Information.
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1) 1992(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $30.44 $19.10 $20.23 $15.47 $14.13
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.19) (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain
(loss) (1.50) 12.37 (1.00) 5.17 1.35
- --------------------------------------------------------------------------------
Total Income (Loss) From Opera-
tions (1.69) 12.10 (1.13) 5.09 1.34
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- --------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $28.11 $30.44 $19.10 $20.23 $15.47
- --------------------------------------------------------------------------------
TOTAL RETURN++ (5.81)% 63.48% (5.59)% 32.90% 9.48%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MIL-
LIONS) $ 237 $ 159 $ 101 $ 50 $ 0.2
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.17% 1.43% 1.49% 1.67% 1.51%+
Net investment loss (0.61) (1.05) (0.94) (0.46) (0.97)+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112% 211%
- --------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS(3) $ 0.06 $ 0.06 -- -- --
- --------------------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average
shares method, which more appropriately presents the per share data for
this year since use of the undistributed method did not accord with
results of operations.
(2) For the period from November 6, 1992 (inception date) to December 31,
1992.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return represents the aggregate total return for the period
indicated and does not reflect any applicable sales charges.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1) 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $29.76 $18.82 $20.08 $15.47 $14.18
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.41) (0.37) (0.27) (0.20) (0.26)
Net realized and unrealized gain
(loss) (1.43) 12.07 (0.99) 5.14 1.55
- -------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.84) 11.70 (1.26) 4.94 1.29
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- -------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $27.28 $29.76 $18.82 $20.08 $15.47
- -------------------------------------------------------------------------------
TOTAL RETURN+ (6.44) 62.30% (6.27)% 31.93% 9.10%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $ 362 $ 171 $ 94 $ 138 $ 78
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.91% 2.04% 2.21% 2.34% 2.32%
Net investment (loss) (1.36) (1.61) (1.66) (1.13) (1.77)
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112% 211%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS(2) $ 0.06 $ 0.06 -- -- --
- -------------------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method did not accord with results of
operations.
(2) As of September, 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
++ Net investment income before reimbursement of expenses by investment adviser
and sub-investment adviser and administrator for the year ended December 31,
1988 was $0.70.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.82 $13.77 $12.04 $11.48 $13.02
- --------------------------------------------------------------------------------------------------
(0.07) 0.29 0.28 0.71++ (0.10)
4.46 (3.70) 1.96 0.70 (1.30)
- --------------------------------------------------------------------------------------------------
4.39 (3.41) 2.24 1.41 (1.40)
- --------------------------------------------------------------------------------------------------
-- (0.23) -- (0.30) (0.14)
(0.03) (0.02) (0.24) -- --
- --------------------------------------------------------------------------------------------------
(0.03) (0.54) (0.51) (0.85) (0.14)
- --------------------------------------------------------------------------------------------------
$14.18 $9.82 $13.77 $12.04 $11.48
- --------------------------------------------------------------------------------------------------
(24.71)% 18.60% 12.60% (10.91)% 7.05%
- --------------------------------------------------------------------------------------------------
$ 82 $ 76 $ 142 $ 170 $ 179
- --------------------------------------------------------------------------------------------------
2.31% 2.30% 2.34% 2.32% 2.09%
(0.74) 2.12 1.69 5.23 (0.63)
- --------------------------------------------------------------------------------------------------
379% 372% 228% 165% 148%
- --------------------------------------------------------------------------------------------------
-- -- -- -- --
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1) 1995 1994(1) 1993(1)(2)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR $29.77 $18.82 $20.08 $22.62
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.41) (0.42) (0.25) (0.16)
Net realized and
unrealized gain (loss) (1.44) 12.13 (1.01) (2.05)
- -----------------------------------------------------------------
Total Income (Loss) From
Operations (1.85) 11.71 (1.26) (2.21)
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76) -- (0.33)
Capital (0.36) -- -- --
- -----------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $27.28 $29.77 $18.82 $20.08
- -----------------------------------------------------------------
TOTAL RETURN++ (6.44)% 62.35% (6.27)% (9.77)%++
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $ 26 $ 9 $ 2 $ 0.2
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.90% 2.25% 2.15% 2.19%+
Net investment loss (1.34) (1.79) (1.60) (0.98)+
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113% 123% 112%
- -----------------------------------------------------------------
AVERAGE COMMISSIONS PAID
ON
EQUITY SECURITY
TRANSACTIONS(3) $ 0.06 $ 0.06 -- --
- -----------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for this
period, since use of the undistributed net investment income method does
not accord with results of operations.
(2) For the period from October 18, 1993 (inception date) to December 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
1996(1)(2)
- -----------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 28.99
- -----------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.08)
Net realized and unrealized gain (loss) (0.06)
- -----------------------------------------------------------------------
Total Income (Loss) From Operations (0.14)
- -----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28)
Capital (0.36)
- -----------------------------------------------------------------------
Total Distributions (0.64)
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 28.21
- -----------------------------------------------------------------------
TOTAL RETURN (0.75)%++
- -----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $93,938
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.82%+
Net investment loss (0.29)+
- -----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 118%
- -----------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS $ 0.06
- -----------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(2) For the period from January 31, 1996 (inception date) to December 31, 1996.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by investing in equity securities (common stocks or
securities which are convertible into or exchangeable for such stocks, includ-
ing warrants) which SBMFM believes to have superior appreciation potential.
There can be no assurance that the Fund will achieve its investment objective.
The Fund attempts to achieve its investment objective by investing primarily
in equity securities of growth companies, generally not within the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by SBMFM.
These companies may not have reached a fully mature stage of earnings growth,
since they may still be in the developmental stage, or may be older companies
which appear to be entering a new stage of more rapid earnings progress due to
factors such as management change or development of new technology, products or
markets. A significant number of these companies may be in technology areas,
including health care related sectors, and may have annual sales of less than
$300 million. The Fund may also choose to invest in some relatively unseasoned
stocks, i.e., securities issued by companies whose market capitalization is
under $100 million.
The Fund also may invest in small capitalization companies representative
of the broad benchmarks against which the Fund's performance is frequently
judged by utilizing an actively managed quantitative investment strategy to
isolate securities that are believed to have a high probability of
outperforming their respective industry/sector peer groups. In implementing
this strategy the Portfolio Manager is supported by investment professionals,
including a team that is quantitatively oriented.
Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, lend its portfolio securities and enter into short sales
"against the box."
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions and the Fund's investment objective are fundamental policies, which means
that they may not be changed without a majority vote of shareholders of the
Fund. Except for the objective and those restrictions specifically identified
as fundamental, all investment policies and practices described in this Pro-
spectus and in the Statement of Additional Information
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
are non-fundamental, so that the Board of Directors may change them without
shareholder approval. The fundamental restrictions applicable to the Fund
include a prohibition on (a) purchasing a security if, as a result, more than
5% of the assets of the Fund would be invested in the securities of the issuer
(with certain exceptions) or the Fund would own more than 10% of the outstand-
ing voting securities of the issuer, (b) investing more than 10% of the Fund's
total assets in "illiquid" securities (which includes repurchase agreements
with more than seven days to maturity), and (c) investing more than 25% of the
Fund's total assets in the securities of issuers in a particular industry (with
exceptions for U.S. government securities and certain money market instru-
ments).
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of, or
are guaranteed by, the U.S. government, its agencies or instrumentalities.
These include bills, certificates of indebtedness, and notes and bonds issued
by the United States Treasury or by agencies or instrumentalities of the United
States government. Some U.S. government securities, such as United States Trea-
sury bills and bonds, are supported by the full faith and credit of the United
States Treasury; others are supported by the right of the issuer to borrow from
the United States Treasury; others, such as those of the Federal National Mort-
gage Association, are supported by the discretionary authority of the United
States government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association and the Federal Home Loan Mort-
gage Corporation ("FHLMC"), are supported only by the credit of the instrumen-
tality. Mortgage participation certificates issued by the FHLMC generally rep-
resent ownership interests in a pool of fixed-rate conventional mortgages.
Timely payment of principal and interest on these certificates is guaranteed
solely by the issuer of the certificates. Other investments will include Gov-
ernment National Mortgage Association Certificates ("GNMA Certificates"), which
are mortgage-backed securities representing part ownership of a pool of mort-
gage loans on which timely payment of interest and principal is guaranteed by
the full faith and credit of the United States government. While the United
States government guarantees the payment of principal and interest on GNMA Cer-
tificates, the market value of the securities is not guaranteed and will fluc-
tuate.
Repurchase Agreements. The Fund may enter into repurchase agreement transac-
tions on U.S. government securities with banks which are the issuers of instru-
ments acceptable for purchase by the Fund and with certain dealers on the Fed-
eral Reserve Bank of New York's list of reporting dealers. Under the terms of a
typical repurchase agreement, the Fund would acquire an underlying debt obliga-
tion for a relatively short period (usually not more than one week) subject to
an obligation of the seller to repurchase, and the Fund to resell, the obliga-
tion at an agreed-upon
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
price and time, thereby determining the yield during the Fund's holding peri-
od. This arrangement results in a fixed rate of return that is not subject to
market fluctuations during the Fund's holding period. Under each repurchase
agreement, the selling institution will be required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securi-
ties, the risk of a possible decline in the value of the underlying securities
during the period in which the Fund seeks to assert its rights to them, the
risk of incurring expenses associated with asserting those rights and the risk
of losing all or part of the income from the agreement. SBMFM, acting under
the supervision of the Board of Directors, reviews on an ongoing basis to
evaluate potential risks, the value of the collateral and the creditworthiness
of those banks and dealers with which the Fund enters into repurchase agree-
ments.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of
U.S. government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and
obtain the return of the securities loaned; (c) the Fund will receive any
interest or dividends paid on the loaned securities; and (d) the aggregate
market value of securities loaned will not at any time exceed 33 1/3% of the
total assets of the Fund.
Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable with-
out further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of
capital gains or losses.
American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States.
Restricted Securities. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual restric-
tions on their resale. Such restrictions might prevent the sale of restricted
securities at a time when such a sale would otherwise be desirable. Restricted
securities and securities for which there is no readily available market ("il-
liquid assets") will not be acquired if such acquisition would cause the
aggregate value of illiquid assets and restricted securities to exceed 10% of
the Fund's total assets.
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, pro-
vide prompt and reliable execution at favorable prices and reasonable commis-
sion rates. SBMFM may select brokers and dealers which provide it with research
services and may cause the Fund to pay such brokers and dealers commissions
which exceed those other brokers and dealers may have charged, if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal year by the monthly average of the value of the Fund's securities, with
money market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for
each of the past fiscal years are set forth under "Financial Highlights."
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
17
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify as a "regu-
lated investment company" under the Code. In any taxable year in which the
Fund so qualifies and distributes at least 90% of its investment company tax-
able income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses),
the Fund (but not its shareholders) generally will be relieved of Federal
income tax on the investment company taxable income and net realized capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, distributed to shareholders. In order to qualify as a regu-
lated investment company, the Fund will be required to meet various Code
requirements.
Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gains dividends are taxable to shareholders as long-
term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
18
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends (including capital gains dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or more will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from U.S. government securities may be exempt from
all state and local income taxes. Shareholders should consult their tax advi-
sors for specific information on the tax consequences of particular types of
distributions.
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or a CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). The Fund also offers a fifth class
of share: Class Z shares, which are offered without a sales charge, CDSC, serv-
ice fee or distribution fee, exclusively to tax-exempt employee benefit and
retirement plans of Smith Barney and its affiliates. Investors meeting these
criteria who are interested in acquiring Class Z shares should contact a Smith
Barney Financial Consultant for a Class Z shares Prospectus. See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to con-
sider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. In addition, certain investors, including qualified retirement plans and
certain
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
other institutional investors, may purchase shares directly through First Data.
When purchasing shares of the Fund, investors must specify whether the purchase
is for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data are not subject to a mainte-
nance fee.
Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis, the mini-
mum initial investment requirement for Class A, Class B and Class C shares and
the subsequent investment requirement for all Classes is $50. There are no min-
imum investment requirements for Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, Directors or Trustees of any of the
Smith Barney Mutual Funds and their spouses and children. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Fund calculates its net
asset value, are priced according to the net asset value determined on that
day, provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or Intro-
ducing Brokers purchasing through Smith Barney, payment for Fund shares is due
on the third business day after the trade date. In all other cases, payment
must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the Sys-
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
tematic Investment Plan, Smith Barney or First Data is authorized, through pre-
authorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis, to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - $ 49,999 4.00 4.17 3.60
50,000 - $ 99,999 3.50 3.63 3.15
100,000 - $249,999 3.00 3.09 2.70
250,000 - $499,999 2.00 2.04 1.80
500,000 and over * * *
- ------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
(including retired Board Members and employees); the immediate families of such
persons (including the surviving spouse of a deceased Board Member or employ-
ee); and to a pension, profit-sharing or other benefit plan for such persons
and (ii) employees of members of the National Association of Securities Deal-
ers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company in connection with the combination of
such company with the Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the pur-
chase of Class A shares is made with the proceeds of the redemption of shares
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchase by shareholders who have redeemed Class
A shares in the Fund (or Class A shares of another fund of the Smith Barney
Mutual Funds that are offered with a sales charge, and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchase by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) purchases by investors participating
in a Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A
shares at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform crite-
ria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the discre-
tion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously pur-
chased and still owned. An alternative is to compute the 13 month period
starting up to 90 days before the date of execution of a Letter of Intent.
Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data to obtain a Letter
of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class
C shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Fund assets; (b) reinvestment of dividends or capital gains
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and
Class A shares that are CDSC Shares, shares redeemed more than 12 months after
their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Programs as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs Pro-
gram."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and Thereafter 0.00
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There also will be converted at that time such propor-
tion of Class B Dividend Shares owned by the shareholder as the total number of
his or her Class B shares converting at the time bears to the total number of
Class B shares (other than Class B Dividend Shares) owned by the shareholder.
See "Prospectus Summary--Alternative Purchase Arrangements--Class B Shares Con-
version Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other applicable Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to represent,
as applicable, capital appreciation or dividend and capital gains distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to Smith
Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The CDSC would not be applied to the amount which represents appreciation
($200) and the value of the reinvested dividend shares ($60). Therefore, $240
of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of
4.00% (the applicable rate for Class B shares) for a total deferred sales
charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by FDISG in the case
of all other shareholders) of the shareholder's status or holdings, as the case
may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in the
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
40l(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. Such Plans will be notified in writing within 30 days after the last
business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
Any Participating Plan in the Smith Barney 401(k) Program, whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity to exchange all of
its Class C shares for Class A shares of the Fund; regardless of asset size, at
the end of the eighth year after the date the Participating Plan enrolled in
the Smith Barney 401(k) Program. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
enrollment date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once an exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Any Class C shares not converted will continue to be subject to the distribu-
tion fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing approximately 60 days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the eighth anniversary date. Once the exchange has occurred, a Par-
ticipating Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If the Participat-
ing Plan elects not to exchange all of its Class B Shares at that time, each
Class B share held by the Participating Plan will have the same conversion fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
28
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are
made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
29
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares may exchange Fund shares for Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive class in any of the funds identified above may do so without imposition of
any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund will provide notice in writing or
by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the funds of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be expected to main-
tain for a significant period of time. All relevant factors will be considered
in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program."
Exchanges will be processed at the net asset value next determined. Redemp-
tion procedures discussed below are also applicable for exchanging shares, and
exchanges will be made upon receipt of all supporting documents in proper form.
If the account registration of the shares of the fund being acquired is identi-
cal to the registration of the shares of the fund exchanged, no signature guar-
antee is required. A capital gain or loss for tax purposes will be realized
upon the exchange, depending upon the cost or other basis of shares redeemed.
Before exchanging shares, investors should read the current prospectus describ-
ing the shares to be acquired. The Fund reserves the right to modify or discon-
tinue exchange privileges upon 60 days prior notice to shareholders.
31
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Special Equities Fund, Inc.
Class A, B, C or Y (please specify)
c/o First Data Investors Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or on a
written redemption request in excess of $2,000 must be guaranteed by an eligi-
ble guarantor institution such as a domestic bank, savings and loan institu-
tion, domestic credit union, member bank of the Federal Reserve System or mem-
ber firm of a national securities exchange. Written redemption requests of
$2,000 or less do not require a signature guarantee unless
32
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
more than one such redemption request is made in any 10-day period. Redemption
proceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's address
of record. First Data may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until First Data
receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the sharehold-
er's account from which shares were redeemed. In order to change the bank
account designated to receive redemption proceeds, a shareholder must complete
a new Telephone/Wire Authorization Form and, for the protection of the share-
holder's assets, will be required to provide a signature guarantee and certain
other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open.
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. For further information regarding the automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial
Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
PERFORMANCE
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are
34
<PAGE>
PERFORMANCE (CONTINUED)
not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC, is
derived from this total return which provides the ending redeemable value. Such
standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
Fund calculates current dividend return for each Class by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The current dividend return for
each Class may vary from time to time depending on market conditions, the com-
position of its investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current dividend return
should be considered when comparing a Class' current return to yields published
for other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
MANAGEMENT OF THE COMPANY AND THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments between the Company and the companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Director and executive officer of the Company.
INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through predecessor entities) has been in
the investment counseling business since 1940. SBMFM renders investment advice
to a wide variety of individual, institutional and investment company clients
which had aggregate assets under management as of February 28, 1997 in excess
of $80 billion.
35
<PAGE>
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
PORTFOLIO MANAGEMENT
George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber listed on page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the annual rate of 0.75% of the average daily net assets attributable
to those Classes. Class B shares that automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to a
distribution fee. The fees are used by Smith Barney to pay its Financial Con-
sultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of print-
ing and mailing prospectuses to potential investors; payments to and expenses
of
36
<PAGE>
DISTRIBUTOR (CONTINUED)
Smith Barney Financial Consultants and other persons who provide support serv-
ices in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Fund shares, including lease, utility, communications and sales promo-
tion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Company's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Smith Barney, amounts received under the Plan and
proceeds of the CDSC.
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into five Classes, A, B, C ,
Y, and Z with a par value of $.001 per share. Each Class of shares has the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Company's transfer agent.
The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected
37
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
by shareholders. The Directors will call a meeting for any purpose upon written
request of shareholders holding at least 10% of the Company's outstanding
shares and the Company will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate fractional vote for any fractional share held of that Class. Gen-
erally, shares of the Company will be voted on a Company-wide basis on all mat-
ters except matters affecting only the interests of one Fund or one Class of
shares.
The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this consol-
idation to apply to their accounts should contact their Smith Barney Financial
Consultant or First Data.
38
<PAGE>
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<PAGE>
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<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
SPECIAL
EQUITIES
FUND
388 Greenwich Street
New York, New York 10013
FD 0232 4/97
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Special
Equities
Fund
Class Z Shares Only
APRIL 30, 1997
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PROSPECTUS April 30, 1997
Smith Barney
Special Equities Fund -- Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation by investing in a diversified portfolio of common stocks or secu-
rities convertible into or exchangeable for common stocks, primarily of growth
companies as identified by the Fund's investment adviser.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). The Company is an open-end, diversified management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Company, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this Pro-
spectus carefully and to retain it for future reference. Shares of other funds
offered by the Company are described in separate Prospectuses that may be
obtained by calling the Company at the telephone number set forth above or by
contacting a Smith Barney Financial Consultant.
The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of Smith
Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans").
Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 30, 1997 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Company at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 8
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 8
- -------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 10
- -------------------------------------------------
PERFORMANCE 11
- -------------------------------------------------
MANAGEMENT OF THE FUND 11
- -------------------------------------------------
ADDITIONAL INFORMATION 12
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Fund, based on the Fund's operating expenses for its most recent fiscal year.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75%
Other expenses 0.05%
- --------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.80%
</TABLE>
- -------------------------------------------------------------------------------
The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase and Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) 5.00% annual return
and (2) redemption at the end of each time
period: $ 8 $26 $44 $99
- -------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two-year period ended December 31, 1996
has been audited in conjunction with the annual audits of the financial
statements of the Fund by KPMG Peat Marwick LLP, independent auditors. The
1996 financial statements and the independent auditors' report thereon appear
in the December 31, 1996 Annual Report to Shareholders.
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
1996(1) 1995(2)
- -----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $30.46 $26.49
- -----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss (0.08) (0.06)
Net realized and unrealized gain (loss) (1.48) 4.79
- -----------------------------------------------------------
Total Income (Loss) From Operations (1.56) 4.73
- -----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (0.28) (0.76)
Capital (0.36) --
- -----------------------------------------------------------
Total Distributions (0.64) (0.76)
- -----------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.26 $30.46
- -----------------------------------------------------------
TOTAL RETURN (5.37)% 17.95%++
- -----------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $12,671 $5,364
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.80% 1.10%+
Net investment loss (0.24) (0.86)+
- -----------------------------------------------------------
PORTFOLIO TURNOVER RATE 118% 113%
- -----------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $ 0.06
- -----------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average
shares method, which more appropriately presents per share data for this
year since use of the undistributed method did not accord with results of
operations.
(2) For the period from October 2, 1995 (inception date) to December 31,
1995.
++
Total return is not annualized, as it may not be representative of the
total return for the year.
+
Annualized.
4
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by investing in equity securities (common stocks or
securities which are convertible into or exchangeable for such stocks, includ-
ing warrants) which Smith Barney Mutual Funds Management Inc. ("SBMFM"), the
Fund's investment adviser, believes to have superior appreciation potential.
There can be no assurance that the Fund will achieve its investment objective.
The Fund attempts to achieve its investment objective by investing primarily
in equity securities of growth companies, generally not within the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by SBMFM.
These companies may not have reached a fully mature stage of earnings growth,
since they may still be in the developmental stage, or may be older companies
which appear to be entering a new stage of more rapid earnings progress due to
factors such as management change or development of new technology, products or
markets. A significant number of these companies may be in technology areas,
including health care related sectors, and may have annual sales of less than
$300 million. The Fund may also choose to invest in some relatively unseasoned
stocks, i.e., securities issued by companies whose market capitalization is
under $100 million.
The Fund also may invest in small capitalization companies representative of
the broad benchmarks against which the Fund's performance is frequently judged
by utiliziang an actively managed quantitative investment strategy to isolate
securities that are believed to have a high probability of outperforming their
respective industry/sector peer groups. In implementing this strategy the port-
folio manager is supported by investment professionals, including a team that
is quantitatively oriented.
Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, lend its portfolio securities and enter into short sales
"against the box."
In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions and the Fund's investment objective are fundamental policies, which means
that they may not be changed without a majority vote of shareholders of the
Fund. Except for the objective and those restrictions specifically identified
as fundamental, all investment policies and practices described in this Pro-
spectus and in the Statement of Additional Information are non-fundamental, so
that the Board of Directors may change them without shareholder approval. The
fundamental restrictions applicable to the
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fund include a prohibition on (a) purchasing a security if, as a result, more
than 5% of the assets of the Fund would be invested in the securities of the
issuer (with certain exceptions) or the Fund would own more than 10% of the
outstanding voting securities of the issuer, (b) investing more than 10% of
the Fund's total assets in "illiquid" securities (which includes repurchase
agreements with more than seven days to maturity), and (c) investing more than
25% of the Fund's total assets in the securities of issuers in a particular
industry (with exceptions for U.S. government securities and certain money
market instruments).
ADDITIONAL INVESTMENTS
U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the U.S. government, its agencies or instrumentalities.
These include bills, certificates of indebtedness, and notes and bonds issued
by the United States Treasury or by agencies or instrumentalities of the
United States government. Some U.S. government securities, such as United
States Treasury bills and bonds, are supported by the full faith and credit of
the United States Treasury; others are supported by the right of the issuer to
borrow from the United States Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the United States government to purchase the agency's obligations; still oth-
ers, such as those of the Student Loan Marketing Association and the Federal
Home Loan Mortgage Corporation ("FHLMC"), are supported only by the credit of
the instrumentality. Mortgage participation certificates issued by the FHLMC
generally represent ownership interests in a pool of fixed-rate conventional
mortgages. Timely payment of principal and interest on these certificates is
guaranteed solely by the issuer of the certificates. Other investments will
include Government National Mortgage Association Certificates ("GNMA Certifi-
cates"), which are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the United States government. While
the United States government guarantees the payment of principal and interest
on GNMA Certificates, the market value of the securities is not guaranteed and
will fluctuate.
Repurchase Agreements. The Fund may enter into repurchase agreement transac-
tions on U.S. government securities with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. Under each repurchase agreement, the sell-
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ing institution will be required to maintain the value of the securities sub-
ject to the repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SBMFM acting under the supervision of
the Board of Directors, reviews on an ongoing basis to evaluate potential
risks, the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily marked-
to-market basis in an amount at least equal to the current market value of the
securities loaned; (b) the Fund may at any time call the loan and obtain the
return of the securities loaned; (c) the Fund will receive any interest or div-
idends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of
the Fund.
Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable with-
out further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of cap-
ital gains or losses.
American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States.
Restricted Securities. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual restric-
tions on their resale. Such restrictions might prevent the sale of restricted
securities at a time when such a sale would otherwise be desirable. Restricted
securities and securities for which there is no readily available market ("il-
liquid assets") will not be acquired if such acquisition would cause the aggre-
gate value of illiquid assets and restricted securities to exceed 10% of the
Fund's total assets.
PORTFOLIO TRANSACTIONS AND TURNOVER
SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, pro-
vide
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
prompt and reliable execution at favorable prices and reasonable commission
rates. SBMFM may select brokers and dealers which provide it with research
services and may cause the Fund to pay such brokers and dealers commissions
which exceed those other brokers and dealers may have charged, if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services.
For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal year by the monthly average of the value of the Fund's securities, with
money market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for
each of the past fiscal years are set forth under "Financial Highlights."
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies will be converted into U.S. dollar values at the mean
between the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
8
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify each year as
a "regulated investment company" under the Code. In any taxable year in which
the Fund so qualifies and distributes at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses),
the Fund (but not its shareholders) generally will be relieved of Federal
income tax on the investment company taxable income and net realized capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, distributed to shareholders. In order to qualify as a regu-
lated investment company, the Fund will be required to meet various Code
requirements.
Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gains dividends are taxable to shareholders as long-
term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
Dividends (including capital gains dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
9
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or more will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with respect to such shares.
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from U.S. government securities may be exempt from
all state and local income taxes. Shareholders should consult their plan docu-
ments and/or tax advisors for specific information on the tax consequences of
participating in a Qualified Plan.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan. Purchases are effected at the net asset value next
determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the "settle-
ment date") after the trade date. Investors who make payment prior to the set-
tlement date may designate a temporary investment (such as a money market fund
of the Smith Barney Mutual Funds) for such payment until settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for a period of time. There are no minimum investment require-
ments for Class Z shares; however, the Fund reserves the right to vary this
policy at any time.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on any day
that the Fund calculates its net asset value, are priced according to the net
asset value determined on that day. See "Valuation of Shares."
Qualified Plans may redeem their shares on any day the Fund calculates its
net asset value. See "Valuation of Shares." Redemption requests received in
proper form prior to the close of regular trading on the NYSE are priced at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. Shareholders acquiring Class Z shares through a Qual-
ified Plan should consult the terms of their respective plans for redemption
provisions.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
10
<PAGE>
PERFORMANCE
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or other types of sales literature. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeem-
able value. Such standard total return information may also be accompanied with
non-standard total return information for differing periods computed in the
same manner but without annualizing the total return or taking sales charges
into account. The Fund calculates current dividend return for Class Z shares by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return may vary from time to time depending on market conditions, the
composition of its investment portfolio and operating expenses. These factors
and possible differences in the methods used in calculating current dividend
return should be considered when comparing Class Z shares' current return to
yields published for other investment companies and other investment vehicles.
The Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. or similar independent services that monitor the per-
formance of mutual funds or other industry publications. the Fund will include
performance data for Class Z shares in any advertisement or information includ-
ing performance data of the Fund.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments between the Company and the companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Director and executive officer of the Company.
11
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
INVESTMENT ADVISER AND ADMINISTRATOR-SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through predecessor entities) has been in
the investment counseling business since 1968 and is a registered investment
adviser. SBMFM renders investment advice to a wide variety of investment com-
pany client, which had aggregate assets under management as of February 28,
1997, in excess of $80 billion.
Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
PORTFOLIO MANAGEMENT
George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber listed on page one of this Prospectus.
DISTRIBUTOR-SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
ADDITIONAL INFORMATION
The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into five Classes, A, B, C,
Y, and Z with a par value of $.001 per share. Each Class of shares has the same
rights,
12
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
privileges and preferences, except with respect to: (a) the designation of each
Class; (b) the effect of the respective sales charges for each Class; (c) the
distribution and/or service fees borne by each Class; (d) the expenses alloca-
ble exclusively to each Class; (e) voting rights on matters exclusively affect-
ing a single Class; (f) the exchange privilege of each Class; and (g) the con-
version feature of the Class B shares. The Board of Directors does not antici-
pate that there will be any conflicts among the interests of the holders of the
different Classes. The Directors, on an ongoing basis, will consider whether
any such conflict exists and, if so, take appropriate action.
The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's out-
standing shares and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate fractional vote for any fractional share held of that
Class. Generally, shares of the Company will be voted on a Company-wide basis
on all matters except matters affecting only the interests of one Fund or one
Class of shares.
The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having multi-
ple accounts (i.e., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or the Fund's transfer agent.
PNC Bank, located at 17th and Chestnut Streets Philadelphia, PA 19103, serves
as custodian of the Fund's investments.
First Data Investor Services Group, Inc., formerly known as The Shareholder
Services Group, Inc., located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent.
13
<PAGE>
SMITH BARNEY
---------------------------------
A MEMBER OF TRAVELERSGROUP LOGO
SMITH BARNEY SPECIAL EQUITIES FUND
388 Greenwich Street
New York, New York 10013
FD 1009 4/97
SMITH BARNEY INVESTMENT FUNDS
PART B
Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
April 30, 1997
This Statement of Additional Information
expands upon and supplements the information
contained in the current Prospectuses of
Smith Barney Investment Funds Inc. (the
"Company"), dated April 30, 1997, as amended
or supplemented from time to time, and should
read in conjunction with the Company's
Prospectuses. The Company issues a
Prospectus for each of the investment funds
offered by the Company (the "Funds"). The
Company's Prospectuses may be obtained from a
Smith Barney Financial Consultant, or by
writing or calling the Company at the address
or telephone number listed above. This
Statement of Additional Information, although
not in itself a prospectus, is incorporated
by reference into the Prospectuses in its
entirety.
CONTENTS
For ease of reference, the same section
headings are used in the Prospectuses and
this Statement of Additional Information,
except where shown below:
Management of the Company (see in the
Prospectuses "Management of the Company and
the Fund")
1
Investment Objectives and Management
Policies
5
Purchase of Shares
22
Redemption of Shares
22
Distributor
23
Valuation of Shares
26
Exchange Privilege
26
Performance Data (See in the Prospectus
"Performance")
27
Taxes (See in the Prospectus "Dividends,
Distributions and Taxes")
31
Additional Information
34
Financial Statements
35
Appendix
A-1
MANAGEMENT OF THE COMPANY
The executive officers of the Company are
employees of certain of the organizations
that provide services to the Company. These
organizations are the following:
Name
Service
Smith Barney Inc. ("Smith Barney")
Distributor
PFS Distributors, Inc.("PFS")
.....................................
Smith Barney Mutual Funds Management
Inc. ("SBMFM")
Distributor (Growth Opportunity
Fund and Investment Grade Bond
Fund)
Investment Adviser and
Administrator
PNC Bank, National Association ("PNC")
Custodian
First Data Investor Services Group, Inc.
("First Data") ......
Transfer Agent
These organizations and the functions they
perform for the Company are discussed in the
Prospectuses and in this Statement of
Additional Information.
Directors and Executive Officers of the
Company
The names of the Directors and executive
officers of the Company, together with
information as to their principal business
occupations during the past five years, are
shown below. Each Director who is an
"interested person" of the Company, as
defined in the Investment Company Act of
1940, as amended (the "1940 Act"), is
indicated by an asterisk.
Paul R. Ades, Director (Age 56). Partner in
the law firm of Murov & Ades. His address is
272 South Wellwood Avenue, P.O. Box 504,
Lindenhurst, New York 11757.
Herbert Barg, Director (Age 73). Private
investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman, Director (Age 65).
Chairman and Chief Operating Officer of the
Chicago Board of Options Exchange. His
address is Chicago Board of Options Exchange,
LaSalle at Van Buren, Chicago, Illinois
60605.
Dwight B. Crane, Director (Age 59).
Professor, Graduate School of Business
Administration, Harvard University. His
address is Graduate School of Business
Administration, Harvard University, Boston,
Massachusetts 02163.
Harvey Eisen, Senior Vice President and
Investment Officer. Vice President of
Investment Funds of Travelers Group Inc. His
address is 388 Greenwich Street, New York, NY
10013.
Frank G. Hubbard, Director (Age 61). Vice
President, S&S Industries; Former Corporate
Vice President, Materials Management and
Marketing Services of Huls America, Inc. His
address is 80 Centennial Avenue P.O. Box 456,
Piscataway, New Jersey 08855-0456.
Allan R. Johnson, Director Emeritus (Age
80). Retired; Former Chairman, Retail
Division of BATUS, Inc., and Chairman and
Chief Executive Officer of Saks Fifth Avenue,
Inc. His address is 2 Sutton Place South, New
York, New York 10022.
*Heath B. McLendon, Chairman of the Board
(Age 63). Managing Director of Smith Barney
and Chairman of the Board of Smith Barney
Strategy Advisers Inc.; prior to July 1993,
Senior Executive Vice President of Shearson
Lehman Brothers Inc. ("Shearson Lehman
Brothers"); Vice Chairman of Shearson Asset
Management; a Director of PanAgora Asset
Management, Inc. and PanAgora Asset
Management Limited. Mr. McLendon is a
director of 41 investment companies
associated with Smith Barney. His address is
388 Greenwich Street, New York, New York
10013.
Ken Miller, Director (Age 55). President of
Young Stuff Apparel Group, Inc. His address
is 1411 Broadway, New York, New York 10018.
John F. White, Director (Age 79). President
Emeritus of The Cooper Union for the
Advancement of Science and Art; Special
Assistant to the President of the Aspen
Institute. His address is Crows Nest Road,
Tuxedo Park, New York 10987.
Jessica M. Bibliowicz, President (Age 37).
Executive Vice President of Smith Barney;
prior to 1994, Director of Sales and
Marketing for Prudential Mutual Funds. Ms.
Bibliowicz serves as President of 40
investment companies associated with Smith
Barney. Her address is 388 Greenwich Street,
New York, New York 10013.
James Conroy, Vice President and Investment
Officer. Managing Director of Smith Barney.
His address is 388 Greenwich Street, New
York, New York 10013.
Douglas H. Johnson, Vice President and
Investment Officer. Director of Mutual Fund
Division of Smith Barney. Prior to January
1995, Vice President of SafeCo Asset
Management Company. His address is 500 108th
Avenue, North E., Bellevue, Washington 98004.
George E. Mueller, Jr., Vice President and
Investment Officer. Managing Director of
SBMFM; prior to July 1993, Managing Director
of Shearson Lehman Advisors. His address is
388 Greenwich Street, New York, New York
10013.
George V. Novello, Vice Presiddent and
Investment Officer. Managing Director of
SBMFM; prior to July 1993, Managing Director
of Shearson Lehman Advisors. Prior to
September 1990, Mr. Novello was a Managing
Director at McKinley-Allsopp, where he served
as Head of Research. His address is 388
Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and
Treasurer (Age 39). Director and Senior Vice
President of SBMFM. Mr. Daidone serves as
Senior Vice President and Treasurer of 41
investment companies associated with Smith
Barney. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary (Age 46).
Managing Director of Smith Barney and
Secretary of SBMFM; General Counsel and
Secretary of SBMFM. Ms. Sydor serves as
Secretary of 41 investment companies
associated with Smith Barney. Her address is
388 Greenwich Street, New York, New York
10013.
Each Director also serves as a director,
trustee and/or general partner of certain
other mutual funds for which Smith Barney
serves as distributor. As of January 31,
1997, the Directors and officers of the
Company, as a group, owned less than 1.00% of
the outstanding common stock of the Company.
No officer, director or employee of Smith
Barney or any parent or subsidiary receives
any compensation from the Company for serving
as an officer or Director of the Company.
The Company pays each Director who is not an
officer, director or employee of Smith Barney
or any of its affiliates a fee of $16,000 per
annum plus $2,500 per meeting attended and
reimburses travel and out-of-pocket expenses.
For the fiscal year ended December 31, 1996,
the Directors of the Company were paid the
following compensation:
Director
Aggregate
Compensation
from the Company
Aggregate
Compensation
from the Smith Barney
Mutual Funds
Paul R. Ades (5)
$28,600.00
$52,475.00
Herbert Barg (20)
28,600.00
105,175.00
Alger B. Chapman (9)
26,000.00
76,775.00
Dwight B. Crane (26)
26,100.00
140,375.00
Frank G. Hubbard (5)
28,600.00
52,475.00
Heath McLendon (41)
N/A
N/A
Ken Miller (5)
26,100.00**
49,475.00
John F. White (5)
28,500.00**
52,375.00
Allan G. Johnson
(5)(*)
18,035.51
33,125.00
+ Number of funds for which director
serves within fund complex
* Director Emeritus
** Mr. Miller and Mr. White have deferred
$6,500 and $26,000, respectively, of
compensation from the Company in 1996.
Investment Adviser and Administrator - SBMFM
SBMFM serves as investment adviser to the
Funds pursuant to separate advisory
agreements (the "Advisory Agreements"). With
respect to the Investment Grade Bond Fund,
Government Securities Fund and Special
Equities Fund, the Advisory Agreements were
transferred to SBMFM effective November 7,
1994, from its affiliate, Mutual Management
Corp. Mutual Management Corp. and SBMFM are
both wholly owned subsidiaries of Smith
Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"). The Advisory
Agreements were most recently approved by the
Board of Directors, including a majority of
the Directors who are not "interested
persons" of the Company or the investment
advisers (the "Independent Directors"), on
July 25, 1996. SBMFM bears all expenses in
connection with the performance of its
services. The services provided by SBMFM
under the Advisory Agreements are described
in the Prospectuses under "Management of the
Company and the Fund." SBMFM provides
investment advisory and management services
to investment companies affiliated with Smith
Barney.
As compensation for investment advisory
services rendered to Investment Grade Bond
Fund, Special Equities Fund, Managed Growth
Fund and Growth Opportunity Fund, each Fund
pays SBMFM a fee computed daily and paid
monthly at the annual rates of 0.45%, 0.55%,
0.85% and 1.00%, respectively, of the value
of their average daily net assets.
As compensation for investment advisory
services rendered to Government Securities
Fund, the Fund pays SBMFM a fee computed
daily and paid monthly at the following
annual rates of average daily net assets:
0.35% up to $2 billion; 0.30% on the next $2
billion; 0.25% on the next $2 billion; 0.20%
on the next $2 billion; and 0.15% on net
assets thereafter.
For the fiscal years ended December 31, 1994,
1995 and 1996, the Funds accrued advisory
fees as follows:
Fund
1994
1995
1996
Investment Grade Bond Fund
$1,926,359
$2,067,222
$2,198,162
Government Securities Fund
2,578,209
2,287,647
1,979,639
Special Equities Fund
1,052,635
1,276,355
3,094,925
Managed Growth Fund
2,022,754
6,034,652
Growth Opportunity Fund
390,902
1,040,355
SBMFM also serves as administrator to
Investment Grade Bond Fund, Government
Securities Fund and Special Equities Fund
pursuant to a written agreement dated May 5,
1994 (the "Administration Agreement"), which
was first approved by the Board of Directors,
including a majority of the Independent
Directors, on May 5, 1994. The services
provided by SBMFM under the Administration
Agreement are described in the Prospectuses
under "Management of the Company and the
Fund." SBMFM pays the salary of any officer
and employee who is employed by both it and
the Fund and bears all expenses in connection
with the performance of its services. Prior
to May 5, 1994, The Boston Company Advisors
("Boston Advisors") served as the Company's
sub-investment adviser and/or administrator.
As compensation for administrative services
rendered to each of Investment Grade Bond
Fund, Government Securities Fund and Special
Equities Fund, SBMFM receives a fee computed
daily and paid monthly at the annual rate of
0.20 of the value of the Fund's average daily
net assets. For the fiscal years ended
December 31, 1994, 1995 and 1996, these Funds
paid administrative fees to Boston Advisors
or SBMFM as follows:
Boston
Advisors
SBMFM
Fund
For the Fiscal Period From 1/1/94
through 5/4/94
For the Fiscal Period From 5/5/94
through 12/31/94
For the Fiscal Year Ended 12/31/95
For the FiscalYear Ended 12/31/96
Investment Grade Bond Fund
$290,859
$565,300
$918,76
5
$976,938
Government Securities Fund
500,505
972,757
1,307,2
22
1,131,222
Special Equities Fund
130,039
252,737
464,129
1,125,428
Counsel and Auditors
Willkie Farr & Gallagher L.L.P.serves as
counsel to the Company. The Directors who
are not "interested persons" of the Company
have selected Stroock & Stroock & Lavan LLP
as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New
York, New York 10154, has been selected as
the Fund's independent auditor to examine and
report on the Fund's financial statements and
highlights for the fiscal year ending
December 31, 1997.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment
objectives of each Fund and the policies they
employ to achieve such objectives. The
following discussion supplements the
description of the Funds' investment
objectives and management policies contained
in the Prospectuses.
Repurchase Agreements. As described in the
applicable Prospectus, each Fund may enter
into repurchase agreements. A repurchase
agreement is a contract under which a Fund
acquires a security for a relatively short
period (usually not more than one week)
subject to the obligation of the seller to
repurchase and the Fund to resell such
security at a fixed time and price
(representing the Fund's cost plus interest).
It is each Fund's present intention to enter
into repurchase agreements only upon receipt
of fully adequate collateral and only with
commercial banks (whether U.S. or foreign)
and registered broker-dealers. Repurchase
agreements may also be viewed as loans made
by a Fund which are collateralized primarily
by the securities subject to repurchase. A
Fund bears a risk of loss in the event that
the other party to a repurchase agreement
defaults on its obligations and the Fund is
delayed or prevented from exercising its
rights to dispose of the collateral
securities. Pursuant to policies established
by the Board of Directors, SBMFM monitors the
creditworthiness of all issuers with which
each Fund enters into repurchase agreements.
Reverse Repurchase Agreements. Each Fund may
enter into reverse repurchase agreements. A
reverse repurchase agreement involves the
sale of a money market instrument held by a
Fund coupled with an agreement by a Fund to
repurchase the instrument at a stated price,
date and interest payment. A Fund will use
the proceeds of a reverse repurchase
agreement to purchase other money market
instruments which either mature at a date
simultaneous with or prior to the expiration
of the reverse repurchase agreement or which
are held under an agreement to resell
maturing as of that time.
A Fund will enter into a reverse repurchase
agreement only when the interest income to be
earned from the investment of the proceeds of
the transaction is greater than the interest
expense of the transaction. Under the 1940
Act, reverse repurchase agreements may be
considered to be borrowings by the seller. A
Fund may not enter into a reverse repurchase
agreement if, as a result, its current
obligations under such agreements would
exceed one-third of the current market value
of a Fund's total assets (less all of its
liabilities other than obligations under such
agreements).
A Fund may enter into reverse repurchase
agreements with banks or broker-dealers.
Entry into such agreements with broker-
dealers requires the creation and maintenance
of a segregated account with the Company's
custodian consisting of U.S. government
securities, cash or cash equivalents.
Warrants. All Funds except the Government
Securities Fund may purchase warrants. A
warrant is a security that gives the holder
the right, but not the obligation, to
subscribe for newly created securities of the
issuer at a fixed price either at a certain
date or during a set period. The Investment
Grade Bond Fund and the Special Equities Fund
will not invest in warrants if, as a result
of such investment, the value of their
investments in warrants, valued at the lower
of cost or market, exceeds 5% of the value of
the Fund's net assets. Included in this 5%
limitation, but not to exceed 2% of the
Fund's net assets, may be warrants which are
not listed on either the New York Stock
Exchange (the "NYSE") or the American Stock
Exchange. Warrants acquired by the Fund in
units or attached to securities will be
deemed to be without value for purposes of
this restriction. These limits are not
fundamental policies of either Fund and may
be changed by the Board of Directors without
shareholder approval.
Short Sales Against the Box. Each Fund may
sell securities short "against the box" which
means that at all times when the short
position is open, the Fund owns an equal
amount of the securities or securities
convertible into, or exchangeable without
further consideration for, securities of the
same issue as the securities sold short.
Short sales against the box are used to defer
recognition of capital gains or losses or to
extend the holding period of securities for
certain Federal income tax purposes.
Firm Commitment Agreements and When-Issued
Purchases. The Government Securities Fund,
Investment Grade Bond Fund and Growth
Opportunity Fund may enter into firm
commitment agreements and purchase when-
issued securities, as decribed more fully in
each Fund's Prospectus. Firm commitment
agreements and when-issued purchases involve
the purchase of securities at an agreed-upon
price on a specified future date. Such
agreements might be entered into, for
example, when a decline in the yield of
securities of a given issuer is anticipated
and a more advantageous yield may be obtained
by committing currently to purchase
securities to be issued later. Liability for
the purchase price, and all the rights and
risks of ownership of the securities, accrue
to the Fund at the time it becomes obligated
to purchase such securities, although
delivery and payment occur at a later date.
Accordingly, if the market price of the
security should decline, the effect of the
agreement would be to obligate the Fund to
purchase the security at a price above the
current market price on the date of delivery
and payment. During the time a Fund is
obligated to purchase such securities, it
will maintain in a segregated account with
the Company's custodian, eligible segregated
assets (as defined in each Fund's Prospectus)
equal to the aggregate current value
sufficient to make payment for the
securities. The Government Securities Fund
and Investment Grade Bond Fund will not enter
into such agreements for the purpose of
investment leverage
Lending Portfolio Securities. Each Fund has
the ability to lend securities from its
portfolio to brokers, dealers and other
financial organizations. Such loans, if and
when made, may not exceed 33 1/3% of a Fund's
total assets taken at value. A Fund will not
lend its portfolio securities to Smith Barney
or its affiliates unless it has applied for
and received specific authority to do so from
the SEC. Loans of portfolio securities will
be collateralized by cash, letters of credit
or U.S. government securities which are
maintained at all times in an amount at least
equal to the current market value of the
loaned securities. From time to time, a Fund
may return a part of the interest earned from
the investment of collateral received for
securities loaned to the borrower and/or a
third party, which is unaffiliated with the
Fund or with Smith Barney, and which is
acting as a "finder."
In lending its securities, a Fund can
increase its income by continuing to receive
interest on the loaned securities as well as
by either investing the cash collateral in
short-term instruments or obtaining yield in
the form of interest paid by the borrower
when U.S. government securities are used as
collateral. Requirements of the SEC, which
may be subject to further modifications,
currently provide that the following
conditions must be met whenever a Fund's
portfolio securities are loaned: (a) the Fund
must receive at least 100% cash collateral or
equivalent securities from the borrower; (b)
the borrower must increase such collateral
whenever the market value of the securities
loaned rises above the level of such
collateral; (c) the Fund must be able to
terminate the loan at any time; (d) the Fund
must receive reasonable interest on the loan,
as well as an amount equal to dividends,
interest or other distributions on the loaned
securities, and any increase in market value;
(e) the Fund may pay only reasonable
custodian fees in connection with the loan;
and (f) voting rights on the loaned
securities may pass to the borrower;
provided, however, that if a material event
adversely affecting the investment in the
loaned securities occurs, the Board of
Directors must terminate the loan and regain
the right to vote the securities. The risks
in lending portfolio securities, as with
other extensions of secured credit, consist
of possible delay in receiving additional
collateral or in the recovery of the
securities or possible loss of rights in the
collateral should the borrower fail
financially. Loans will be made to firms
deemed by SBMFM to be of good standing and
will not be made unless, in the judgment of
SBMFM, the consideration to be earned from
such loans would justify the risk.
Government Securities. Direct obligations of
the United States Treasury include a variety
of securities, which differ in their interest
rates, maturities and dates of issuance.
Treasury Bills have maturities of one year or
less; Treasury Notes have maturities of one
to ten years and Treasury Bonds generally
have maturities of greater than ten years at
the date of issuance.
In addition to direct obligations of the
United States Treasury, securities issued or
guaranteed by the United States government,
its agencies or instrumentalities include
securities issued or guaranteed by the
Federal Housing Administration, Federal
Financing Bank, Export-Import Bank of the
United States, Small Business Administration,
Government National Mortgage Association
("GNMA"), General Services Administration,
Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal National
Mortgage Association ("FNMA"), Federal
Maritime Administration, Tennessee Valley
Authority, Resolution Trust Corporation,
District of Columbia Armory Board, Student
Loan Marketing Association and various
institutions that previously were or
currently are part of the Farm Credit System
(which has been undergoing a reorganization
since 1987). Because the United States
government is not obligated by law to provide
support to an instrumentality that it
sponsors, a Fund will invest in obligations
of an instrumentality to which the United
States government is not obligated by law to
provide support only if SBMFM determines that
the credit risk with respect to the
instrumentality does not make its securities
unsuitable for investment by a Fund.
Exchange Rate-Related U.S. Government
Securities. The Government Securities Fund
may invest up to 5% of its net assets in U.S.
government securities for which the principal
repayment at maturity, while paid in U.S.
dollars, is determined by reference to the
exchange rate between the U.S. dollar and the
currency of one or more foreign countries
("Exchange Rate-Related Securities"). The
interest payable on these securities is
denominated in U.S. dollars, is not subject
to foreign currency risks and, in most cases,
is paid at rates higher than most other U.S.
government securities in recognition of the
foreign currency risk component of Exchange
Rate-Related Securities.
Exchange Rate-Related Securities are issued
in a variety of forms, depending on the
structure of the principal repayment formula.
The principal repayment formula may be
structured so that the securityholder will
benefit if a particular foreign currency to
which the security is linked is stable or
appreciates against the U.S. dollar. In the
alternative, the principal repayment formula
may be structured so that the securityholder
benefits if the U.S. dollar is stable or
appreciates against the linked foreign
currency. Finally, the principal repayment
formula can be a function of more than one
currency and, therefore, be designed in
either of the aforementioned forms or a
combination of those forms.
Investments in Exchange Rate-Related
Securities entail special risks. There is
the possibility of significant changes in
rates of exchange between the U.S. dollar and
any foreign currency to which an Exchange
Rate-Related Security is linked. If currency
exchange rates do not move in the direction
or to the extent anticipated at the time of
purchase of the security, the amount of
principal repaid at maturity might be
significantly below the par value of the
security, which might not be offset by the
interest earned by the Fund over the term of
the security. The rate of exchange between
the U.S. dollar and other currencies is
determined by the forces of supply and demand
in the foreign exchange markets. These
forces are affected by the international
balance of payments and other economic and
financial conditions, government
intervention, speculation and other factors.
The imposition or modification of foreign
exchange controls by the United States or
foreign governments or intervention by
central banks also could affect exchange
rates. Finally, there is no assurance that
sufficient trading interest to create a
liquid secondary market will exist for
particular Exchange Rate-Related Securities
due to conditions in the debt and foreign
currency markets. Illiquidity in the forward
foreign exchange market and the high
volatility of the foreign exchange market may
from time to time combine to make it
difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring
a significant price loss.
Special Considerations Relating to Options on
Certain U.S. Government Securities
Treasury Bonds and Notes. Because
trading interest in U.S. Treasury bonds and
notes tends to center on the most recently
auctioned issues, the exchanges will not
continue indefinitely to introduce new
expirations to replace expiring options on
particular issues. The expirations
introduced at the commencement of options
trading on a particular issue will be allowed
to run, with the possible addition of a
limited number of new expirations as the
original expirations expire. Options trading
on each issue of bonds or notes will thus be
phased out as new options are listed on more
recent issues, and a full range of
expirations will not ordinarily be available
for every issue on which options are traded.
Treasury Bills. Because the
deliverable U.S. Treasury bill changes from
week to week, writers of U.S. Treasury bill
calls cannot provide in advance for their
potential exercise settlement obligations by
acquiring and holding the underlying
security. However, if the Fund holds a long
position in U.S. Treasury bills with a
principal amount corresponding to the
contract size of the option, it may be hedged
from a risk standpoint. In addition, the
Fund will maintain U.S. Treasury bills
maturing no later than those which would be
deliverable in the event of the exercise of a
call option it has written in a segregated
account with its custodian so that it will be
treated as being covered for margin purposes.
GNMA Certificates. GNMA Certificates
are mortgage-backed securities representing
part ownership of a pool of mortgage loans.
These loans are made by private lenders and
are either insured by the Federal Housing
Administration or guaranteed by the Veterans
Administration. Once approved by GNMA, the
timely payment of interest and principal on
each mortgage in a "pool" of such mortgages
is guaranteed by the full faith and credit of
the U.S. government. Unlike most debt
securities, GNMA Certificates provide for
repayment of principal over the term of the
loan rather than in a lump sum at maturity.
GNMA Certificates are called "pass-through"
securities because both interest and
principal payments on the mortgages are
passed through to the holder.
Since the remaining principal balance of GNMA
Certificates declines each month as mortgage
payments are made, the Fund as a writer of a
GNMA call may find that the GNMA Certificates
it holds no longer have a sufficient
remaining principal balance to satisfy its
delivery obligation in the event of exercise
of the call options it has written. Should
this occur, additional GNMA Certificates from
the same pool (if obtainable) or replacement
GNMA Certificates will have to be purchased
in the cash market to meet delivery
obligations.
The Fund will either replace GNMA
Certificates representing cover for call
options it has written or will maintain in a
segregated account with its custodian cash,
cash equivalents or U.S. government
securities having an aggregate value equal to
the market value of the GNMA Certificates
underlying the call options it has written.
Other Risks. In the event of a
shortage of the underlying securities
deliverable on exercise of an option, the
Options Clearing Corporation has the
authority to permit other, generally
comparable securities to be delivered in
fulfillment of option exercise obligations.
If the Options Clearing Corporation exercises
its discretionary authority to allow such
other securities to be delivered it may also
adjust the exercise prices of the affected
options by setting different prices at which
otherwise ineligible securities may be
delivered. As an alternative to permitting
such substitute deliveries, the Options
Clearing Corporation may impose special
exercise settlement procedures.
The hours of trading for options on U.S.
government securities may not conform to the
hours during which the underlying securities
are traded. To the extent that the options
markets close before the markets for the
underlying securities, significant price and
rate movements can take place in the
underlying markets that cannot be reflected
in the options markets.
Options are traded on exchanges on only a
limited number of U.S. government securities,
and exchange regulations limit the maximum
number of options which may be written or
purchased by a single investor or a group of
investors acting in concert. The Company and
other clients advised by affiliates of Smith
Barney may be deemed to constitute a group
for these purposes. In light of these
limits, the Board of Directors may determine
at any time to restrict or terminate the
public offering of the Fund's shares
(including through exchanges from the other
Funds).
Exchange markets in options on U.S.
government securities are a relatively new
and untested concept. It is impossible to
predict the amount of trading interest that
may exist in such options, and there can be
no assurance that viable exchange markets
will develop or continue.
Leverage Through Borrowing. The Government
Securities Fund may borrow up to 25% of the
value of its net assets on an unsecured basis
from banks to increase its holdings of
portfolio securities or to acquire securities
to be placed in a segregated account with its
custodian for various purposes (e.g., to
secure puts written by the Fund). The Fund
is required to maintain continuous asset
coverage of 300% with respect to such
borrowings, and to sell (within three days)
sufficient portfolio holdings to restore such
coverage, if it should decline to less than
300% due to market fluctuations or otherwise,
even if disadvantageous from an investment
standpoint. Leveraging will exaggerate the
effect of any increase or decrease in the
value of portfolio securities on the Fund's
net asset value, and money borrowed will be
subject to interest costs (which may include
commitment fees and/or the cost of
maintaining minimum average balances) which
may or may not exceed the interest and option
premiums received from the securities
purchased with borrowed funds.
Special Risks Involving Investments in
Smaller, Newer Companies. The Special
Equities Fund invests primarily in equity
securities of growth companies that have
yet to reach a fully mature stage of earnings
growth. A significant number of these
companies may be in technology areas and may
have annual sales less than $300 million.
Some of the securities in which the Fund
invests may not be listed on a national
securities exchange, but such securities will
usually have an established over-the-counter
market. Investors should realize that the
very nature of investing in smaller, newer
companies involves greater risk than is
customarily associated with investing in
larger, more established companies. Smaller,
newer companies often have limited product
lines, markets or financial resources, and
they may be dependent for management upon one
of a few key persons. The securities of such
companies may be subject to more abrupt or
erratic market movements than securities of
larger, more established companies or than
the market averages in general. In
accordance with its investment objective of
long-term capital appreciation, securities
purchased for the Fund will not generally be
traded for short-term profits, but will be
retained for their longer-term appreciation
potential. This general practice limits the
Fund's ability to adopt a defensive position
by investing in money market instruments
during periods of market downturn.
Accordingly, while in periods of market
upturn the Fund may outperform the market
averages, in periods of downturn, it is
likely to underperform the market averages.
Thus, investing in Special Equities Fund may
involve greater risk than investing in other
Funds.
Investment Restrictions
The Fund's investment objectives and the
investment restrictions set forth below are
fundamental policies of each Fund, i.e., they
may not be changed with respect to a Fund
without a majority vote of the outstanding
shares of that Fund. (All other investment
practices described in the Prospectuses and
the Statement of Additional Information may
be changed by the Board of Directors without
the approval of shareholders.)
Unless otherwise indicated, all percentage
limitations apply to each Fund on an
individual basis, and apply only at the time
a transaction is entered into. (Accordingly,
if a percentage restriction is complied with
at the time of investment, a later increase
or decrease in the percentage which results
from a relative change in values or from a
change in the Fund's net assets will not be
considered a violation.)
Restrictions Applicable to All Funds. No
Fund may:
1.Purchase the securities of any one issuer,
other than the U.S. government or its
agencies or instrumentalities, if
immediately after such purchase more than 5%
of the value of the total assets of the Fund
would be invested in securities of such
issuer;
2.Invest in real estate (including real
estate limited partnerships), real estate
mortgage loans, or interests in oil, gas
and/or mineral exploration, mineral leases
or development programs, provided that this
limitation shall not prohibit the purchase
of securities by companies, including real
estate investment trusts, which invest in
real estate or interests therein;
3.Purchase securities of any other
investment company, except in connection
with a merger, consolidation,
reorganization, or acquisition or assets.
(For purposes of this limitation, foreign
banks or their agencies or subsidiaries are
not considered "investment companies") (the
Managed Growth Fund may purchase the
securities of closed-end investment
companies to the extent permitted by law);
4.Make investments in securities for the
purpose of exercising control over or
management of the issuer;
5.Participate on a joint or a joint and
several basis in any trading account in
securities. (The "bunching" of orders of
two or more Funds or of one or more Funds
and of other accounts for the sale or
purchase of portfolio securities shall not
be considered participation in a joint
securities trading account);
6.Purchase the securities of any one issuer
if, immediately after such purchase, the
Fund would own more than 10% of the
outstanding voting securities of such
issuer;
7.Purchase securities on margin, except such
short-term credits as are necessary for the
clearance of transactions. (For this
purpose, the deposit or payment by
Government Securities Fund of initial or
maintenance margin in connection with
futures contracts and related options is not
considered to be the purchase of a security
on margin. Additionally, borrowing by
Government Securities Fund to increase its
holdings of portfolio securities is not
considered to be the purchase of securities
on margin);
8.Make loans, except that this restriction
shall not prohibit (a) the purchase and
holding of a portion of an issue of publicly
distributed debt securities, (b) the lending
of portfolio securities, or (c) entry into
repurchase agreements;
9.Invest in securities of an issuer which,
together with any predecessor, has been in
operation for less than three years if, as a
result, more than 5% of the total assets of
the Fund would then be invested in such
securities (for purposes of this restriction,
issuers include predecessors, sponsors,
controlling persons, general guarantors and
originators of underlying assets);
10.Purchase the securities of an issuer if
one or more of the Directors or officers of
the Company individually own beneficially
more than 0.5 of 1% of the outstanding
securities of such issuer or together own
beneficially more than 5% of such securities;
11.Purchase a security which is not readily
marketable if, as a result, more than 10% of
the Fund's total assets would consist of such
securities. (For purposes of this
limitation, restricted securities and
repurchase agreements having more than seven
days remaining to maturity are considered not
readily marketable);
12.Purchase the securities of issuers
conducting their principal business
activities in the same industry, if
immediately after such purchase the value of
its investments in such industry would exceed
25% of the value of the total assets of the
Fund, provided that (a) neither all utility
companies (including telephone companies), as
a group, nor all banks, savings and loan
associations and savings banks, as a group,
will be considered a single industry for
purposes of this limitation, and (b) there is
no such limitation with respect to repurchase
agreements or to investments in U.S.
government securities or certificates of
deposit or bankers' acceptances issued by
domestic institutions (but not their foreign
branches).
13.Sell securities short, unless at all times
when a short position is open, it owns an
equal amount of the securities or securities
convertible into, or exchangeable without
payment of any further consideration for,
securities of the same issue as the
securities sold short; or
Restrictions Applicable to All Funds Except
Government Securities Fund. The Funds
may not:
1. Invest in commodities or commodity
futures contracts;
2 Borrow amounts in excess of 5% (33 1/3% in
the case of the Managed Growth Fund and the
Growth Opportunity Fund) of their total
assets taken at cost or at market value,
whichever is lower, and then only from banks
as a temporary measure for extraordinary or
emergency purposes. A Fund may not
mortgage, pledge or in any other manner
transfer any of its assets as security for
any indebtedness. This restriction shall
not prohibit entry into reverse repurchase
agreements, provided that a Fund may not
enter into a reverse repurchase agreement
if, as a result, its current obligations
under such agreements would exceed one-third
of the current market value of the Fund's
total assets (less its liabilities other
than obligations under such agreements); or
3.Write, purchase or sell puts, calls,
straddles, spreads or any combinations
thereof (the Managed Growth Fund and the
Growth Opportunity Fund each may purchase
puts, calls, straddles, spreads and any
combination thereof up to 5% of their
assets).
Restrictions Applicable to All Funds Except
Special Equities Fund, Growth Opportunity
Fund and Managed Growth Fund. The Funds may
not:
1.Purchase securities which may not be
resold to the public without registration
under the Securities Act of 1993, as amended
(the "1933 Act"); or
2.Act as an underwriter of securities.
Restrictions Applicable to Special Equities
Fund. Special Equities Fund may not act as
an underwriter of securities, except that the
Fund may invest up to 10% of its total assets
in securities which it may not be free to
resell without registration under the 1933
Act, in which registration the Fund may
technically be deemed an underwriter for
purposes of the 1933 Act.
Restrictions Applicable to Investment Grade
Bond Fund Only. Investment Grade Bond Fund
may not purchase corporate bonds unless rated
at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or purchase
commercial paper unless issued by a U.S.
corporation and rated at the time of purchase
Prime-1 or Prime-2 by Moody's or A-1 or A-2
by S&P (or, if not rated, issued by a
corporation having outstanding debt rated Aa
or better by Moody's or AA or better by S&P),
although it may continue to hold a security
if its quality rating is reduced by a rating
service below those specified.
Brokerage
In selecting brokers or dealers to execute
securities transactions on behalf of a Fund,
SBMFM seeks the best overall terms available.
In assessing the best overall terms available
for any transaction, SBMFM will consider the
factors that it deems relevant, including the
breadth of the market in the security, the
price of the security, the financial
condition and execution capability of the
broker or dealer and the reasonableness of
the commission, if any, for the specific
transaction and on a continuing basis. In
addition, each investment advisory agreement
authorizes SBMFM, in selecting brokers or
dealers to execute a particular transaction
and in evaluating the best overall terms
available, to consider the brokerage and
research services (as those terms are defined
in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Company, the
other Funds and other accounts over which
SBMFM or its affiliates exercise investment
discretion. The fees under the investment
advisory agreements and the administration
agreement between the Company and SBMFM are
not reduced by reason of their receiving such
brokerage and research services. The Board
of Directors periodically will review the
commissions paid by the Funds to determine if
the commissions paid over representative
periods of time were reasonable in relation
to the benefits inuring to the Company. SEC
rules require that commissions paid to Smith
Barney by a Fund on exchange transactions not
exceed "usual and customary brokerage
commissions." The rules define "usual and
customary" commissions to include amounts
which are "reasonable and fair compared to
the commission, fee or other remuneration
received or to be received by other brokers
in connection with comparable transactions
involving similar securities being purchased
or sold on a securities exchange during a
comparable period of time." The Board of
Directors, particularly the Independent
Directors of the Company (as defined in the
1940 Act), has adopted procedures for
evaluating the reasonableness of commissions
paid to Smith Barney and reviews these
procedures periodically. In addition, under
rules adopted by the SEC, Smith Barney may
directly execute transactions for a Fund on
the floor of any national securities
exchange, provided: (a) the Board of
Directors has expressly authorized Smith
Barney to effect such transactions; and (b)
Smith Barney annually advises the Fund of the
aggregate compensation it earned on such
transactions.
To the extent consistent with applicable
provisions of the 1940 Act and the rules and
exemptions adopted by the SEC thereunder, the
Board of Directors has determined that
transactions for a Fund may be executed
through Smith Barney and other affiliated
broker-dealers if, in the judgment of SBMFM,
the use of such broker-dealer is likely to
result in price and execution at least as
favorable as those of other qualified broker-
dealers, and if, in the transaction, such
broker-dealer charges the Fund a rate
consistent with that charged to comparable
unaffiliated customers in similar
transactions.
Portfolio securities are not purchased from
or through Smith Barney or any affiliated
person (as defined in the 1940 Act) of Smith
Barney where such entities are acting as
principal, except pursuant to the terms and
conditions of exemptive rules or orders
promulgated by the SEC. Pursuant to
conditions set forth in rules of the SEC, the
Company may purchase securities from an
underwriting syndicate of which Smith Barney
is a member (but not from Smith Barney).
Such conditions relate to the price and
amount of the securities purchased, the
commission or spread paid, and the quality of
the issuer. The rules further require that
such purchases take place in accordance with
procedures adopted and reviewed periodically
by the Board of Directors, particularly those
Directors who are not interested persons of
the Company.
The Funds may use Smith Barney as a
commodities broker in connection with
entering into futures contracts and commodity
options. Smith Barney has agreed to charge
the Funds commodity commissions at rates
comparable to those charged by Smith Barney
to its most favored clients for comparable
trades in comparable accounts.
The following table sets forth certain
information regarding each Fund's payment of
brokerage commissions to Smith Barney:
Fiscal Year Ended December 31,
Special Equities Fund
Managed GrowthFund
Growth Opportunity Fund
Total Brokerage Commissions
1994
$217,269
N/A
N/A
1995
$56,735
$164,975
$201,706
1996
$378,451
$1,272,7
02
$716,937
Commissions paid to Smith Barney
1994
$14,280
N/A
N/A
1995
$11,052
$140,970
$650
1996
$47,100
$166,656
$21,6
80
% of Total Brokerage Commissions paid to Smith Barney
1996
12.4%
13.1%
3.0%
% of Total Transactions Involving Commissions paid
to Smith Barney
1996
7.3%
11.5%
3.0%
____________________
No commissions were paid by the Investment
Grade Bond Fund and Goverment Securites Fund.
Portfolio Turnover
For reporting purposes, a Fund's portfolio
turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio
securities for the fiscal year by the monthly
average of the value of the portfolio
securities owned by the Fund during the
fiscal year. In determining such portfolio
turnover, all securities whose maturities at
the time of acquisition were one year or less
are excluded. A 100% portfolio turnover rate
would occur, for example, if all of the
securities in the Fund's investment portfolio
(other than short-term money market
securities) were replaced once during the
fiscal year.
Investment Grade Bond Fund will not normally
engage in the trading of securities for the
purpose of realizing short-term profits, but
it will adjust its portfolio as considered
advisable in view of prevailing or
anticipated market conditions. Portfolio
turnover will not be a limiting factor should
SBMFM deem it advisable to purchase or sell
securities.
Special Equities Fund invests for long-term
capital appreciation and will not generally
trade for short-term profits. However, its
portfolio will be adjusted as deemed
advisable by SBMFM, and portfolio turnover
will not be a limiting factor should SBMFM
deem it advisable to purchase or sell
securities.
The options activities of Government
Securities Fund may affect its portfolio
turnover rate and the amount of brokerage
commissions paid by the Fund. The exercise
of calls written by the Fund may cause the
Fund to sell portfolio securities, thus
increasing its turnover rate. The exercise
of puts also may cause the sale of securities
and increase turnover; although such exercise
is within the Fund's control, holding a
protective put might cause the Fund to sell
the underlying securities for reasons which
would not exist in the absence of the put.
The Fund will pay a brokerage commission each
time it buys or sells a security in
connection with the exercise of a put or
call. Some commissions may be higher than
those which would apply to direct purchases
or sales of portfolio securities. High
portfolio turnover involves correspondingly
greater commission expenses and transaction
costs.
For the fiscal years ended December 31, 1995
and 1996, the portfolio turnover rates were
as follows:
Fund
1995
1996
Investment Grade Bond Fund
49%
48%
Government Securities Fund
294%
420%
Special Equities Fund
113%
118%
Managed Growth
Fund..................................
6%
34%
Growth Opportunity
Fund..................................
0%
183%
Increased portfolio turnover necessarily
results in correspondingly greater brokerage
commissions which must be paid by the Fund.
To the extent that portfolio trading results
in realization of net short-term capital
gains, shareholders will be taxed on such
gains at ordinary tax rates (except
shareholders who invest through IRAs and
other retirement plans which are not taxed
currently on accumulations in their
accounts).
SBMFM manages a number of private investment
accounts on a discretionary basis and it is
not bound by the recommendations of the Smith
Barney research department in managing the
Funds. Although investment decisions are
made individually for each client, at times
decisions may be made to purchase or sell the
same securities for one or more of the Funds
and/or for one or more of the other accounts
managed by SBMFM or the Fund manager. When
two or more such accounts simultaneously are
engaged in the purchase or sale of the same
security, transactions are allocated in a
manner considered equitable to each, with
emphasis on purchasing or selling entire
orders wherever possible. In some cases,
this procedure may adversely affect the price
paid or received by the Fund or the size of
the position obtained or disposed of by the
Fund.
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges on Class A
shares described in the Prospectuses apply to
purchases made by any "purchaser," which
defined to include the following: (a) an
individual; (b) an individual's spouse and
his or her children purchasing shares for his
or her own account; (c) a trustee or other
fiduciary purchasing shares for a single
trust estate or single fiduciary account; (d)
a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a)
of the Internal Revenue Code of 1986, as
amended (the "Code"), and qualified employee
benefit plans of employers who are
"affiliated persons" of each other within the
meaning of the 1940 Act; (e) tax-exempt
organizations enumerated in Section 501(c)(3)
or (13) of the Code; and (f) a trustee or
other professional fiduciary (including a
bank, or an investment adviser registered
with the SEC under the Investment Advisers
Act of 1940, as amended) purchasing shares of
a Fund for one or more trust estates of
fiduciary accounts. Purchasers who wish to
combine purchase orders to take advantage of
volume discounts on Class A shares should
contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the
schedule in the Prospectuses, apply to any
purchase of Class A shares if the aggregate
investment of any purchaser in Class A shares
of a Fund and in Class A shares of the other
Funds in the Company and of other funds of
the Smith Barney Mutual Funds that are
offered with a sales charge, including the
purchase being made is $25,000 or more. The
reduced sales charge is subject to
confirmation of the shareholder's holdings
through a check of appropriate records. Each
Fund reserves the right to terminate or amend
the combined right of accumulation at any
time after written notice to shareholders.
For further information regarding the right
of accumulation, shareholders should contact
a Smith Barney Financial Consultant.
Determination of Public Offering Price
Each Fund offers its shares to the public on
a continuous basis. The public offering
price for a Class A and Class Y share of each
Fund is equal to the net asset value per
share at the time of purchase plus, for Class
A shares, an initial sales charge based on
the aggregate amount of the investment. The
public offering price for a Class B share and
Class C share, and Class A share purchases,
including applicable right of accumulation,
equaling or exceeding $500,000, is equal to
the net asset value per share at the time of
purchase and no sales charge is imposed at
the time of purchase. A contingent deferred
sales charge ("CDSC"), however, is imposed on
certain redemptions of Class B shares, Class
C shares, and Class A shares when purchased
in amounts equaling or exceeding $500,000.
The method of computation of the public
offering price is shown in each Fund's
financial statements, incorporated by
reference in their entirety into this
Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or
the date of payment postponed (a) for any
period during which the NYSE is closed (other
than for customary weekend and holiday
closings), (b) when trading in markets a Fund
normally utilizes is restricted, or an
emergency as determined by the SEC exists, so
that disposal of the Fund's investments or
determination of net asset value is not
reasonably practicable or (c) for such other
periods as the SEC by order may permit for
the protection of the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Company
determines that it would be detrimental to
the best interests of the remaining
shareholders of a Fund to make a redemption
payment wholly in cash, the Fund may pay, in
accordance with the SEC rules, any portion of
a redemption in excess of the lesser of
$250,000 or 1% of the Fund's net assets by a
distribution in kind of portfolio securities
in lieu of cash. Securities issued as a
distribution in kind may incur brokerage
commissions when shareholders subsequently
sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the
"Withdrawal Plan") is available to
shareholders who own shares with a value of
at least $10,000 ($5,000 for retirement plan
accounts) and who wish to receive specific
amounts of cash monthly or quarterly.
Withdrawals of at least $50 may be made under
the Withdrawal Plan by redeeming as many
shares of a Fund as may be necessary to cover
the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts
withdrawn by shareholders that exceed 1.00%
per month of the value of a shareholder's
shares at the time the Withdrawal Plan
commences. To the extent withdrawals exceed
dividends, distributions and appreciation of
a shareholder's investment in a Fund, there
will be a reduction in the value of the
shareholder's investment and continued
withdrawal payments may reduce the
shareholder's investment and ultimately
exhaust it. Withdrawal payments should not
be considered as income from investment in
the Fund. Furthermore, as it generally would
not be advantageous to a shareholder to make
additional investments in the Fund at the
same time that he or she is participating in
the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000
will not ordinarily be permitted.
Shareholders who wish to participate in the
Withdrawal Plan and who hold their shares in
certificate form must deposit their share
certificates with First Data as agent for
Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal
Plan are automatically reinvested at net
asset value in additional shares of the
Company. Withdrawal Plans should be set up
with a Smith Barney Financial Consultant. A
shareholder who purchases shares directly
through First Data may continue to do so and
applications for participation in the
Withdrawal Plan must be received by First
Data no later than the eighth day of the
month to be eligible for participation
beginning with that month's withdrawal. For
additional information, shareholders should
contract a Smith Barney Financial Consultant.
DISTRIBUTORS
Smith Barney serves as the Company's
distributor on a best efforts basis pursuant
to a distribution agreement (the
"Distribution Agreement") which was most
recently approved by the Company's Board of
Directors on July 25, 1996.
PFS serves as one of the Company's
distributors with respect to the Growth
Opportunity Fund and Investment Grade Bond
Fund pursuant to a Distribution Agreement
which was most recently approved by the
Company's Board of Directors on July 25,
1996.
When payment is made by the investor before
the settlement date, unless otherwise
directed by the investor, the funds will be
held as a free credit balance in the
investor's brokerage account, and Smith
Barney may benefit from the temporary use of
the funds. The investor may designate
another use for the funds prior to settlement
date, such as investment in a money market
fund (other than Smith Barney Exchange
Reserve Fund) of the Smith Barney Mutual
Funds. If the investor instructs Smith
Barney to invest the funds in a Smith Barney
money market fund, the amount of the
investment will be included as part of the
average daily net assets of both the Company
and the money market fund, and affiliates of
Smith Barney that serve the funds in an
investment advisory capacity will benefit
from the fact that they are receiving fees
from both such investment companies for
managing these assets computed on the basis
of their average daily net assets. The
Company's Board of Directors has been advised
of the benefits to Smith Barney resulting
from these settlement procedures and will
take such benefits into consideration when
reviewing the Advisory, Administration and
Distribution Agreements for continuance.
For the fiscal year ended December 31, 1996,
Smith Barney incurred distribution expenses
totaling approximately $11,195,985,
consisting of approximately $834,786 for
advertising, $82,862 for printing and mailing
of Prospectuses, $6,683,975 for support
services, $14,110,451 to Smith Barney
Financial Consultants, and $850,755 in
accruals for interest on the excess of Smith
Barney expenses incurred in distributing the
Fund's shares over the sum of the
distribution fees and CDSC received by Smith
Barney from the Fund.
Distribution Arrangements
To compensate Smith Barney for the services
it provides and for the expense it bears
under the Distribution Agreement, the Company
has adopted a services and distribution plan
(the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, each Fund pays
Smith Barney and, with respect to the Class A
and Class B shares of Growth Opportunity Fund
and Investment Grade Bond Fund, PFS a service
fee, accrued daily and paid monthly,
calculated at the annual rate of 0.25% of the
value of each Fund's average daily net assets
attributable to the Class A, Class B and
Class C shares. In addition, the Fund pays
Smith Barney, and with respect to the Class
B shares of Growth Opportunity Fund and
Investment Grade Bond Fund, PFS, a
distribution fee with respect to the Class B
and Class C shares primarily intended to
compensate Smith Barney and/or PFS for its
initial expense of paying its Financial
Consultants and Registered Representatives,
respectively, a commission upon sales of
those shares. Such shares' distribution
fees, which are accrued daily and paid
monthly, are calculated at the annual rate of
0.75% of the value of average daily net
assets attributable to the Class B and Class
C shares with respect to Special Equities
Fund, Managed Growth Fund and Growth
Opportunity Fund, and 0.50% of the value of
average daily net assets attributable to the
Class B shares and 0.45% of the value of
average daily net assets attributable to
Class C shares, with respect to Government
Securities Fund and Investment Grade Bond
Fund.
The following expenses were incurred during
the periods indicated:
Sales Charges paid to Smith Barney.
Class A
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$114,571
$181,000
$182,000
Government Securities Fund
66,217
63,000
65,000
Special Equities Fund
186,104
347,000
1,800,000
Managed Growth Fund
N/A
5,400,000
1,700,000
Growth Opportunity Fund
N/A
18,000
18,000
CDSC paid to Smith Barney.
Class B
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$556,007
$541,000
$422,000
Government Securities Fund
629,700
512,000
305,000
Special Equities Fund
288,013
379,000
658,000
Managed Growth Fund
N/A
174,000
1,112,000
Growth Opportunity Fund
N/A
N/A
3,000
Class C
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
N/A
$5,000
$1,000
Government Securities Fund
N/A
1,000
0
Special Equities Fund
N/A
1,000
22,000
Managed Growth Fund
N/A
10,000
27,000
Growth Opportunity Fund
N/A
N/A
1,000
Service Fees
Class A
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$147,152
$505,094
$524,533
Government Securities Fund
334,848
1,212,522
1,026,748
Special Equities Fund
147,488
286,910
525,204
Managed Growth Fund
N/A
189,955
495,536
Growth Opportunity Fund
N/A
63,606
162,606
Class B
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$922,038
$638,293
$662,187
Government Securities Fund
1,505,763
419,433
340,572
Special Equities Fund .
329,007
283,978
696,750
Managed Growth Fund
N/A
351,874
1,024,802
Growth Opportunity Fund
N/A
34,096
96,931
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$1,009
$5,068
$14,456
Government Securities Fund
967
2,078
3,050
Special Equities Fund
1,975
8,675
56,094
Managed Growth Fund.
N/A
47,170
141,702
Growth Opportunity Fund
N/A
23
552
Distribution Fees
Class B
Name of Fund
Fiscal YearEnded 12/31/94
Fiscal YearEnded 12/31/95
Fiscal YearEnded 12/31/96
Investment Grade Bond Fund
$ 1,844,077
$ 1,276,588
$ 1,324,350
Government Securities Fund
3,011,526
838,868
681,144
Special Equities Fund
987,022
851,933
2,090,250
Managed Growth Fund
........
N/A
1,055,621
3,074,405
Growth Opportunity Fund
N/A
102,289
290,792
Class C
(formerly designated as Class D)
Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96
Investment Grade Bond Fund
$1,958
$9,124
$ 26,020
Government Securities Fund
1,893
3,741
5,491
Special Equities Fund
5,927
26,026
168,282
Managed Growth Fund
N/A
141,508
425,107
Growth Opportunity Fund
N/A
71
1,657
Under its terms, the Plan continues from year
to year, provided such continuance is
approved annually by vote of the Board of
Directors, including a majority of the
Independent Directors. The Plan may not be
amended to increase the amount to be spent
for the services provided by Smith Barney or
PFS without shareholder approval, and all
amendments of the Plan also must be approved
by the Directors in the manner described
above. The Plan may be terminated at any
time, without penalty, by vote of a majority
of the Independent Directors or by a vote of
a majority of the outstanding voting
securities of the Company (as defined in the
1940 Act). Pursuant to the Plan, Smith Barney
and PFS will provide the Board of Directors
periodic reports of amounts expended under
the Plan and the purpose for which such
expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is
calculated on each day, Monday through
Friday, except days on which the NYSE is
closed. The NYSE currently is scheduled to
be closed on New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday
when one of these holidays falls on a
Saturday or Sunday, respectively. Because of
the differences in distribution fees and
Class-specific expenses, the per share net
asset value of each Class may differ. The
following is a description of the procedures
used by the Funds in valuing its assets.
A security which is listed or traded on more
than one exchange is valued at the quotation
on the exchange determined to be the primary
market for such security. All assets and
liabilities initially expressed in foreign
currency values will be converted into U.S.
dollar values at the mean between the bid and
offered quotations of such currencies against
U.S. dollars as last quoted by any recognized
dealer. If such quotations are not available,
the rate of exchange will be determined in
good faith by the Board of Directors. In
carrying out the Board of Directors'
valuation policies, SBMFM, as administrator,
may consult with an independent pricing
service (the "Pricing Service") retained by
the Company.
Debt securities of United States issuers
(other than U.S. government securities and
short-term investments) are valued by SBMFM,
as administrator, after consultation with the
Pricing Service approved by the Board of
Directors. When, in the judgment of the
Pricing Service, quoted bid prices for
investments are readily available and are
representative of the bid side of the market,
these investments are valued at the mean
between the quoted bid prices and asked
prices. Investments for which, in the
judgment of the Pricing Service, there are
not readily obtainable market quotations are
carried at fair value as determine by the
Pricing Service. The procedures of the
Pricing Service are reviewed periodically by
the officers of the Company under the general
supervision and responsibility of the Board
of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any
fund of the Smith Barney Mutual Funds may
exchange all or part of their shares for
shares of the same class of other funds of
the Smith Barney Mutual Funds, to the extent
such shares are offered for sale in the
shareholder's state of residence and provided
your Registered Representative or your
investment dealer is authorized to distribute
shares of the fund, on the basis of relative
net asset value per share at the time of
exchange. Class B shares of any fund may be
exchanged without a CDSC. Class B shares of
the Fund exchanged for Class B shares of
another fund will be subject to the higher
applicable CDSC of the two funds and, for the
purposes of calculating CDSC rates and
conversion periods, will be deemed to have
been held since the date the shares being
exchanged were deemed to be purchased.
The exchange privilege enables shareholders
to acquire shares of the same Class in a fund
with different investment objectives when
they believe that a shift between funds is an
appropriate investment decision. This
privilege is available to shareholders
residing in any state in which the fund
shares being acquired may legally be sold.
Prior to any exchange, the shareholder should
obtain and review a copy of the current
prospectus of each fund into which an
exchange is being considered. Prospectuses
may be obtained from a Smith Barney Financial
Consultant or Registered Representative of
PFS Investments Inc..
Upon receipt of proper instructions and all
necessary supporting documents, shares
submitted for exchange are redeemed at the
then-current net asset value and, subject to
any applicable CDSC, the proceeds are
immediately invested at a price as described
above, in shares of the fund being acquired.
Smith Barney reserves the right to reject any
exchange request. The exchange privilege may
be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, a Fund may quote its yield
or total return in advertisements or in
reports and other communications to
shareholders. The Fund may include
comparative performance information in
advertising or marketing the Fund's shares.
Such performance information may include the
following industry and financial
publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing
Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA
Today and The Wall Street Journal. To the
extent any advertisement or sales literature
of a Fund describes the expenses or
performance of a Class, it will also disclose
such information for the other Classes.
Yield
A Fund's 30-day yield figure described below
is calculated according to a formula
prescribed by the SEC. The formula can be
expressed as follows:
YIELD = 2[(a (minus) bcd + 1)6 (minus) 1]
Where:
a =
dividends and interest earned during the period.
b =
expenses accrued for the period (net of
reimbursement).
c =
the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d =
the maximum offering price per share on the last day
of the period.
For the purpose of determining the interest
earned (variable "a" in the formula) on debt
obligations purchased by the Fund at a
discount or premium, the formula generally
calls for amortization of the discount or
premium; the amortization schedule will be
adjusted monthly to reflect changes in the
market values of the debt obligations.
Investors should recognize that in periods of
declining interest rates a Fund's yield will
tend to be somewhat higher than prevailing
market rates, and in periods of rising
interest rates, the Fund's yield will tend to
be somewhat lower. In addition, when
interest rates are falling, the inflow of net
new money to the Fund from the continuous
sales of its shares will likely be invested
in portfolio instruments producing lower
yields than the balance of the Fund's
investments, thereby reducing the current
yield of the Fund. In periods of rising
interest rates, the opposite can be expected
to occur.
Average Annual Total Return
"Average annual total return" figures, as
described below, are computed according to a
formula prescribed by the SEC. The formula
can be expressed as follows:
P(1+T)n = ERV
Where:
P =
a hypothetical initial payment of $1,000.
T =
average annual total return.
n =
number of years.
ERV =
Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a 1-
, 5- or 10-year period at the end of the 1-5-
or 10- year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions. A Class' total
return figures calculated in accordance with
the above formula assume that the maximum
applicable sales charge or maximum applicable
CDSC, as the case may be, has been deducted
from the hypothetical $1,000 initial investment
at the time of purchase or redemption, as
applicable.
Class A average annual total returns were as
follows for the periods indicated:
Name of Fund
Year Ended
December 31, 1996
Inception*
Through December 31,
1996
Investment Grade Bond Fund
(4.92)%
9.02%
Government Securities Fund
(2.62)%
5.15%
Special Equities Fund
(10.51)%
18.36%
Managed Growth Fund
10.54%
7.94%
Growth Opportunity Fund **
8.28%
14.44%
__________________
* The Investment Grade Bond, Government
Securities and Special Equities Funds
commenced selling Class A shares on
November 6, 1992. The Managed Growth Fund
and Growth Opportunity Fund Commenced
Selling Class A shares on June 30, 1995 and
July 3, 1995, respectively.
** Performance calculations include the
historical return information related to
the Common Sense II Aggressive Opportunity
Fund of the Common Sense Trust (for the
period from May 3, 1994 through June 30,
1995.)
Class B's average annual total returns were
as follows for the periods indicated:
Name of Fund
Year Ended December 31, 1996
Five YearPeriod EndedDecember 31, 1996
Ten YearPeriod EndedDecember 31, 1996(1)
Inception Through December 31, 1996
Investment Grade Bond Fund
(5.07)%
9.11%
8.83%
11.39%
Government Securities Fund
(2.89)%
5.26%
6.50%
8.04%
Special Equities Fund
(11.03)%
15.31%
10.26%
10.55%
Managed Growth Fund
10.55%
N/A
N/A
8.30%
Growth Opportunity Fund **
8.12%
N/A
N/A
15.14%
__________________
(1) Class B shares automatically convert to
Class A shares eight years after date of
original purchase. Thus, a shareholder's
actual return for the ten years ended
December 31, 1994 would be different than
that reflected above.
** Performance calculations include the
historical return information related to
the Common Sense II Aggressive Opportunity
Fund of the Common Sense Trust (for the
period from May 3, 1994 through June 30,
1995.)
Class C's average annual total returns were
as follows for the periods indicated:
Name of Fund
One Year Period Ended
12/31/96
Inception Through 12/31/96
Investment Grade Bond Fund (1)
(1.76)%
7.83%
Government Securities Fund (2)
0.52%
4.87%
Special Equities Fund (3)
(7.38)%
8.11%
Managed Growth Fund (4)
14.45%
10.83%
Growth Opportunity Fund (5)
.............
12.24%
15.98%
__________________
(1) The Fund commenced selling Class C shares
on February 26, 1993.
(2) The Fund commenced selling Class C
shares on February 4, 1993.
(3) The Fund commenced selling Class C
shares on October 18, 1993.
(4) The Fund commenced selling Class C
shares on June 30, 1995.
(5) The Fund commenced selling Class C
shares on July 3, 1995.
Aggregate Total Return
Aggregate total return figures, as described
below, represent the cumulative change in the
value of an investment in the Class of the
specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN =
ERV(minus)P
P
Where:
P =
a hypothetical initial payment of $1,000.
ERV =
Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of a
1-, 5- or 10-year period (a fractional portion
thereof) at the end of the 1-5- or 10- year
period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total returns were as
follows for the periods indicated:
Name of Fund
One Year Period Ended
December 31,
1996**
Period from Inception
throughDecember 31,
1996**
One Year Period Ended
December 31, 1996***
Period from Inception
through December 31,
1996***
Investment Grade Bond Fund
(0.47)%
49.96%
(4.92)%
43.21%
Government Securities Fund
1.96%
29.01%
(2.62)%
23.21%
Special Equities Fund
(5.81)%
111.55%
(10.51)%
101.02%
Managed Growth Fund
16.33%
18.12%
10.54%
12.22%
Growth Opportunity Fund****
13.96%
50.83%
8.28%
43.31%
__________________
*The Investment Grade Bond Fund, Government
Securities Fund, and Special Equities Fund
commenced selling Class A shares on
November 6, 1992. The Managed Growth Fund
and Growth Opportunity Fund commenced
selling Class A shares on June 30, 1995 and
July 3, 1995, respectively.
**Figures do not include the effect of the
maximum sales charge.
***Figures include the effect of the
maximum sales charge.
****Performance calculations include the
historical return information related to
the Common Sense II Aggressive Opportunity
Fund of the Common Sense Trust (for the
period from May 3, 1994 through June 30,
1995.
Class B's aggregate total returns were as
follows for the periods indicated:
Name of Fund
One YearPeriod Ended
Dec. 31,1996*
Five YearPeriod Ended
Dec. 31,1996*
Ten Year PeriodEnded
Dec. 31,1996*
Period fromInception
through Dec. 31, 1996*
One Year PeriodEnded
Dec. 31,1996**
Five Year Period Ended
Dec. 31,1996**
Ten Year PeriodEnded
Dec. 31, 1996**(1)
Period from Inception
through Dec. 31, 1996**
Investment Grade
Bond Fund
(0.89)%
54.64%
133.15%
441.23%
(5.07)%
53.64%
133.15%
441.23%
Government Securities
Fund
1.42%
30.23%
87.74%
168.75%
(2.89)%
29.23%
87.74%
168.75%
Special Equities
Fund
(6.44)%
104.83%
165.64%
309.77%
(11.03)%
103.83%
165.64%
309.77%
Managed Growth Fund
15.55%
16.79%
10.55%
12.79%
Growth Opportunity
Fund***
13.12%
48.68%
8.12%
45.07%
__________________
* Figures do not include the effect of the
CDSC (maximum 4.50% for Investment Grade
Bond Fund and Government Securities Fund
and 5.00% for the other Funds).
** Figures include the effect of the maximum
applicable CDSC, if any.
(1) Class B shares automatically convert to
Class A shares eight years after date of
original purchase. Thus, a shareholder's
actual return for the ten years ended
December 31, 1995 would be different than
that reflected above.
*** Performance calculations include the
historical return information related to
the Common Sense II Aggressive Opportunity
Fund of the Common Sense Trust (for the
period from May 3, 1994 through June 30,
1995.
Class C's aggregate total returns were as
follows for the periods indicated:
Name of Fund
One Year Period Ended
Dec. 31, 1996**
Period from Inception*
through Dec. 31,1996**
One Year Period Ended
Dec. 31, 1996***
Period from Inception*
through Dec. 31,
1996***
Investment Grade Bond
Fund
(0.83)%
33.62%
(1.76)%
33.62%
Government Securities
Fund
1.47%
20.41%
0.52%
20.41%
Special Equities Fund
(6.44)%
28.40%
(7.38)%
28.40%
Managed Growth Fund
15.45%
16.79%
14.45%
16.79%
Growth Opportunity Fund
13.24%
23.07%
12.24%
23.07%
__________________
* Investment Grade Bond Fund, Government
Securities Fund, Special Equities Fund,
Managed Growth Fund and Growth Opportunity
Fund commenced selling Class C shares on
February 26, 1993, February 4, 1993 October
18, 1993, June 30, 1995 and July 3, 1995,
respectively. Class C shares are sold at
net asset value without any sales charge or
CDSC.
** Figures do not include the effect of the
CDSC.
*** Figures include the effect of the
applicable CDSC (1.00%)
It is important to note that the yield and
total return figures set forth above are
based on historical earnings and are not
intended to indicate future performance. A
Class' performance will vary from time to
time depending upon market conditions, the
composition of the Fund's investment
portfolio and operating expenses and the
expenses exclusively attributable to the
Class. Consequently, any given performance
quotation should not be considered
representative of the Class' performance for
any specified period in the future. Because
performance will vary, it may not provide a
basis for comparing an investment in the
Class with certain bank deposits or other
investments that pay a fixed yield for a
stated period of time. Investors comparing
the Class' performance with that of other
mutual funds should give consideration to the
quality and maturity of the respective
investment companies' portfolio securities.
TAXES
The following is a summary of certain Federal
income tax considerations that may affect the
Company and its shareholders. The summary is
not intended as a substitute for individual
tax advice, and investors are urged to
consult their tax advisors as to the tax
consequences of an investment in any Fund of
the Company.
Tax Status of the Funds
Each Fund will be treated as a separate
taxable entity for Federal income tax
purposes.
Each Fund has qualified and the Company
intends that each Fund will continue to
qualify separately each year as a "regulated
investment company" under the Code. A
qualified Fund will not be liable for Federal
income taxes to the extent that its taxable
net investment income and net realized
capital gains are distributed to its
shareholders, provided that each Fund
distributes at least 90% of its net
investment income.
Each Fund intends to accrue dividend income
for Federal income tax purposes in accordance
with the rules applicable to regulated
investment companies. In some cases, these
rules may have the effect of accelerating (in
comparison to other recipients of the
dividend) the time at which the dividend is
taken into account by a Fund as taxable
income.
Certain options, futures contracts and
forward contracts in which the Funds may
invest are "section 1256 contracts." Gains
or losses on 1256 contracts generally are
considered 60% long-term and 40% short-term
capital gains or losses ("60/40"); however,
foreign currency gains or losses arising from
certain section 1256 contracts may be treated
as ordinary income or loss. Also, section
1256 contracts held by a Fund at the end of
each taxable year are "marked-to-market" with
the result that unrealized gains or losses
are treated as though they were realized and
the resulting gain or loss is treated as
60/40 gain or loss as ordinary income or
loss, as the case may be. These contracts
also may be marked-to-market for purposes of
the 4% excise tax under rules prescribed in
the Code.
Many of the hedging transactions undertaken
by the Funds will result in "straddles" for
Federal income tax purposes. Straddles are
defined to include "offsetting positions" in
actively traded personal property. It is not
entirely clear under what circumstances one
investment made by a Fund will be treated as
offsetting another investment held by the
Fund. In general, positions are offsetting
if there is a substantial diminution in the
risk of loss from holding one position by
reason of holding one or more other
positions. The straddle rules may affect the
character of gains (or losses) realized on
straddle positions. In addition, losses
realized by a Fund on straddle positions may
be deferred under the straddle rules, rather
than being taken into account in calculating
the taxable income for the taxable year in
which losses are realized. The hedging
transactions may also increase the amount of
gains from assets held less than three
months. As a result, the 30% limit on gains
from certain assets held less then three
months, which applies to regulated investment
companies, may restrict a Fund in the amount
of hedging transactions which it may
undertake. In addition, hedging transactions
may increase the amount of short-term capital
gain realized by a Fund which is taxed as
ordinary income when distributed to the
shareholders. The Fund may make one or more
of the elections available under the Code
which are applicable to straddles. If a Fund
makes any of the elections, the amount,
character and timing of the recognition of
gain or losses from the effected straddle
positions will be determined under rules that
vary according to the election(s) made.
Distributions of investment company taxable
income generally are taxable to shareholders
as ordinary income. In view of each Fund's
investment policy, it is expected that
dividends from domestic corporations will
constitute a portion of the gross income of
several of the Funds but not of others.
Therefore, it is expected that a portion of
the income distributed by the Special
Equities Fund but not others (Investment
Grade Bond Fund and Government Securities
Fund) may be eligible for the dividends-
received deduction for corporations.
Distributions of net realized capital gains
designated by a Fund as capital gains
dividends are taxable to shareholders as
long-term capital gain, regardless of the
length of time the shares of a Fund have been
held by a shareholder. Distributions of
capital gains, whether long or short-term,
are not eligible for the dividends-received
deduction.
Dividends (including capital gain dividends)
declared by a Fund in October, November or
December of any calendar year to shareholders
of record on a date in such a month will be
deemed to have been received by shareholders
on December 31 of that calendar year,
provided that the dividend is actually paid
by the Fund during January of the following
calendar year.
All dividends are taxable to the shareholder
whether reinvested in additional shares or
received in cash. Shareholders receiving
distributions in the form of additional
shares will have a cost basis for Federal
income tax purposes in each share received
equal to the net asset value of a share of
the Fund on the reinvestment date.
Shareholders will be notified annually as to
the Federal tax status of distributions.
Under the Code, gains or losses attributable
to fluctuations in currency exchange rates
which occur between the time a Fund accrues
income or other receivables or accrues
expenses or other liabilities denominated in
a foreign currency and the time a Fund
actually collects such receivables or pays
such liabilities, generally are treated as
ordinary income or ordinary loss. Similarly,
on disposition of debt securities denominated
in a foreign currency and on disposition of
certain futures contracts, forward contracts
and options, gains or losses attributable to
fluctuations in the value of certain currency
between the date of acquisition of the
security and the date of disposition also are
treated as ordinary gain or loss. These
gains or losses, referred to under the Code
as "section 988" gains or losses, may
increase or decrease the amount of a Fund's
investment company taxable income to be
distributed to its shareholders as ordinary
income.
It is expected that certain dividends and
interest received by the Fund will be subject
to foreign withholding taxes. So long as
more than 50% in value of a Fund's total
assets at the close of a given taxable year
consists of stocks or securities of foreign
corporations, the Fund may elect to treat any
foreign taxes paid or accrued by it as paid
by its shareholders. Each Fund will notify
shareholders in writing each year whether it
makes the election and the amount of foreign
taxes it has elected to have treated as paid
by the shareholders. If a Fund makes the
election, shareholders will be required to
include as income their proportionate share
of the amount of foreign taxes paid or
accrued by the Fund and generally be entitled
to claim either a credit or deduction (as an
itemized deduction) for their share of the
taxes in computing their Federal income tax,
subject to limitations.
Generally, a credit for foreign taxes is
subject to the limitation that it may not
exceed the shareholder's United States tax
attributable to his or her total foreign
source taxable income. For this purpose, if
the pass-through election is made, the source
of the electing Fund's income will flow
through to its shareholders. With respect to
a Fund, gains from the sales of securities
generally will be treated as derived from
United States sources and certain currency
fluctuation gains, including fluctuation
gains from foreign currency denominated debt
securities, receivables and payables, will be
treated as ordinary income derived from
United States sources. The limitation on the
foreign tax credit is applied separately to
foreign source passive income (as defined for
purposes of the foreign tax credit),
including the foreign source passive income
passed through by a Fund. Shareholders may
be unable to claim a credit for the full
amount of their proportionate share of the
foreign tax paid or accrued by a Fund. A
foreign tax credit can be used to offset only
90% of the alternative minimum tax (as
computed under the Code for purposes of the
limitation) imposed on corporations and
individuals. If a Fund is not eligible to
make the election to "pass through" to its
shareholders its foreign taxes, the foreign
taxes it pays will reduce investment company
taxable income and the distributions by that
Fund will be treated as United States source
income.
The foregoing is only a general description
of the foreign tax credit. Because
application of the credit depends on the
particular circumstances of each shareholder,
shareholders are advised to consult their own
tax advisors.
Distributions by a Fund reduces the net asset
value of the Fund's shares. Should a
distribution reduce the net asset value below
a shareholder's cost basis, such distribution
nevertheless generally would be taxable to
the shareholder as ordinary income or capital
gains as described above, even though, from
an investment standpoint, it may constitute a
partial return of capital. In particular,
investors should be careful to consider the
tax implications of buying shares just prior
to a distribution. The price of shares
purchased at that time includes the amount of
the forthcoming distribution but the
distribution generally would be taxable to
him.
Upon redemption, sale or exchange of his
shares, a shareholder will realize a taxable
gain or loss depending upon his basis for his
shares. Such gain or loss will be treated as
capital gain or loss if the shares are
capital assets in the shareholder's hands.
Such gain or loss generally will be long-term
or short-term depending upon the
shareholder's holding period for the shares.
However, a loss realized by a shareholder on
the sale of shares of a Fund with respect to
which capital gain dividends have been paid
will, to the extent of such capital gain
dividends, be treated as long-term capital
loss if such shares have been held by the
shareholder for six months or less. A gain
realized on a redemption, sale or exchange
will not be affected by a reacquisition of
shares. A loss realized on a redemption,
sale or exchange, however, will be disallowed
to the extent the shares disposed of are
replaced (whether through reinvestment of
distributions or otherwise) within a period
of 61 days beginning 30 days before and
ending 30 days after the shares are disposed
of. In such a case, the basis of the shares
acquired will be adjusted to reflect the
disallowed loss.
For the purposes of computing the revised
alternative minimum tax of 20% for
corporations, 75% of the excess of the
adjusted current earnings (as defined in the
Code) over other alternative minimum taxable
income is treated as an adjustment item.
Shareholders are advised to consult their own
tax advisors for details regarding the
alternative minimum tax.
If a Fund purchases shares in certain foreign
investment funds classified under the Code as
a "passive foreign investment company," the
Fund may be subject to Federal income tax on
a portion of an "excess distribution" and
gain from the disposition of such shares,
even though such income may have to be
distributed as a taxable dividend by the Fund
to its shareholders. In addition, gains on
the disposition of shares in a passive
foreign investment company generally are
treated as ordinary income even though the
shares are capital assets in the hands of the
Company. Certain interest charges may be
imposed on either the Fund or its
shareholders in respect of any taxes arising
from such distributions or gains. A Fund may
be eligible to elect to include in its gross
income its share of earnings of a passive
foreign investment company on a current
basis. Generally the election would
eliminate the interest charge and the
ordinary income treatment on the disposition
of stock, but such an election may have the
effect of accelerating the recognition of
income and gains by the Fund compared to a
fund that did not make the election. In
addition, another election may be available
that would involve marking to market a Fund's
passive foreign investment company shares at
the end of each taxable year (and on certain
other dates prescribed in the Code), with the
result that unrealized gains are treated as
though they were realized. If this election
were made, tax at the Fund level under the
passive foreign investment company rules
would generally be eliminated, but the Fund
could, in limited circumstances, incur
nondeductible interest charges. Each Fund's
intention to qualify annually as a regulated
investment company may limit its elections
with respect to shares of passive foreign
investment companies.
Because the application of the passive
foreign investment company rules may affect,
among other things, the character of gains,
the amount of gain or loss and the timing of
the recognition of income with respect to
passive foreign investment company shares, as
well as subject a Fund itself to tax on
certain income from such shares, the amount
that must be distributed to shareholders, and
which will be taxed to shareholders as
ordinary income or long-term capital gain,
may be increased or decreased substantially
as compared to a fund that did not invest in
passive foreign investment companies.
If a shareholder (a) incurs a sales charge in
acquiring shares of the Company, (b) disposes
of those shares within 90 days and (c)
acquires shares in a mutual fund for which
the otherwise applicable sales charge is
reduced by reason of a reinvestment right
(i.e., exchange privilege), the original
sales charge increases the shareholder's tax
basis in the original shares only to the
extent the otherwise applicable sales charge
for the second acquisition is not reduced.
The portion of the original sales charge that
does not increase the shareholder's tax basis
in the original shares would be treated as
incurred with respect to the second
acquisition and, as a general rule, would
increase the shareholder's tax basis in the
newly acquired shares. Furthermore, the same
rule also applies to a disposition of the
newly acquired shares made within 90 days of
a subsequent acquisition. This provision
prevents a shareholder from immediately
deducting the sales charge by shifting his or
her investment in a family of mutual funds.
Backup Withholding. If a shareholder fails
to furnish a correct taxpayer identification
number, fails to fully report dividend or
interest income, or fails to certify that he
or she has provided a correct taxpayer
identification number and that he or she is
not subject to such withholding, then the
shareholder may be subject to a 31% "backup
withholding tax" with respect to (a) any
taxable dividends and distributions and (b)
any proceeds of any redemption of Company
shares. An individual's taxpayer
identification number is his or her social
security number. The backup withholding tax
is not an additional tax and may be credited
against a shareholder's regular federal
income tax liability.
The foregoing discussion relates only to
Federal income tax law as applicable to
United States citizens. Distributions by the
Funds also may be subject to state, local and
foreign taxes, and their treatment under
state, local and foreign income tax laws may
differ from the Federal income tax treatment.
The Government Securities Fund's dividends,
to the extent they consist of interest from
obligations of the United States government
and certain of its agencies and
instrumentalities, may be exempt from state
and local income taxes in some jurisdictions.
The Company intends to advise shareholders of
the proportion of that Fund's dividends which
are derived from such interest. Shareholders
should consult their tax advisors with
respect to particular questions of Federal,
state, local and foreign taxation.
ADDITIONAL INFORMATION
The Company was incorporated on September 29,
1981 under the name Hutton Investment Series
Inc. The Company's corporate name was
changed on December 29, 1988, July 30, 1993
and October 28, 1994, to SLH Investment
Portfolios Inc., Smith Barney Shearson
Investment Funds Inc., and Smith Barney
Investment Funds, Inc., respectively.
PNC Bank, located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103,
serves as the custodian of the Company.
Under its custody agreement with the Company,
PNC Bank holds the Company's fund securities
and keeps all necessary accounts and records.
For its services, PNC Bank receives a monthly
fee based upon the month-end market value of
securities held in custody and also receives
transaction charges. PNC bank is authorized
to establish separate accounts for foreign
securities owned by the Company to be held
with foreign branches of other domestic banks
as well as with certain foreign banks and
securities depositories. The assets of the
Company are held under bank custodianship in
compliance with the 1940 Act.
First Data located at Exchange Place, Boston,
Massachusetts 02109, serves as the Company's
transfer agent. For these services, First
Data receives a monthly fee computed on the
basis of the number of shareholder accounts
it maintains with the Company during the
month and is reimbursed for out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Annual Reports for each Fund for the
fiscal year ended December 31, 1996 are
incorporated herein by reference in their
entirety.
APPENDIX
BOND (AND NOTE) RATINGS
Moody's Investors Service, Inc. ("Moody's")
Aaa - Bonds that are rated "Aaa" are
judged to be of the best quality. They carry
the smallest degree of investment risk and
are generally referred to as "gilt edge."
Interest payments are protected by a large or
by an exceptionally stable margin and
principal is secure. While the various
protective elements are likely to change,
such changes as can be visualized are most
unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated "Aa" are
judged to be of high quality by all
standards. Together with the "Aaa" group
they comprise what are generally known as
high grade bonds. They are rated lower than
the best bonds because margins of protection
may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of
greater amplitude or there may be other
elements present that make the long term
risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that are rated "A" possess
many favorable investment attributes and are
to be considered as upper medium grade
obligations. Factors giving security to
principal and interest are considered
adequate but elements may be present that
suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated "Baa" are
considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly
secured. Interest payments and principal
security appear adequate for the present but
certain protective elements may be lacking or
may be characteristically unreliable over any
great length of time. Such bonds lack
outstanding investment characteristics and in
fact have speculative characteristics as
well.
Ba - Bonds that are rated Ba are judged
to have speculative elements; their future
cannot be considered as well assured. Often
the protection of interest and principal
payments may be very moderate and thereby not
well safeguarded during both good and bad
times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds that are rated B generally
lack characteristics of desirable
investments. Assurance of interest and
principal payments or of maintenance of other
terms of the contract over any long period of
time may be small.
Caa - Bonds that are rated Caa are of
poor standing. These issues may be in
default or present elements of danger may
exist with respect to principal or interest.
Ca - Bonds that are rated Ca represent
obligations which are speculative in a high
degree. Such issues are often in default or
have other marked short-comings.
C - Bonds that are rated C are the
lowest rated class of bonds, and issues so
rated can be regarded as having extremely
poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers
1, 2 and 3 in each generic rating
classification from Aa through B. The
modifier 1 indicates that the security ranks
in the higher end of its generic rating
category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Ratings Group ("Standard &
Poors")
AAA - Debt rated "AAA" has the highest
rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated "AA" has a very strong
capacity to pay interest and repay principal
and differs from the highest rated issues
only in small degree.
A - Debt rated "A" has a strong
capacity to pay interest and repay principal
although it is somewhat more susceptible to
the adverse effects of changes in
circumstances and economic conditions than
debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as
having an adequate capacity to pay interest
and repay principal. Whereas it normally
exhibits adequate protection parameters,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity to pay interest and repay
principal for debt in this category than in
higher rated categories.
BB, B and CCC - Bonds rated BB and B
are regarded, on balance, as predominantly
speculative with respect to capacity to pay
interest and repay principal in accordance
with the terms of the obligation. BB
represents a lower degree if speculation than
B and CCC the highest degree of speculation.
While such bonds will likely have some
quality and protective characteristics, these
are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C - The rating C is reserved for income
bonds on which no interest is being paid.
D - Bonds rated D are in default, and
payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by
the addition of a plus or a minus sign, which
is used to show relative standing within the
major rating categories, except in the AAA
category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related
supporting institutions) have a superior
capacity for repayment of short-term
promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the
following characteristics: leading market
positions in well-established industries;
high rates of return on funds employed;
conservative capitalization structures with
moderate reliance on debt and ample asset
protection; broad margins in earnings
coverage of fixed financial charges and high
internal cash generation; well-established
access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related
supporting institutions) have a strong
capacity for repayment of short-term
promissory obligations. This will normally
be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will
be more subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that
the degree of safety regarding timely payment
is either overwhelming or very strong. Those
issues determined to possess overwhelming
safety characteristics will be denoted with a
plus (+) sign designation.
A-2 - Capacity for timely payment on
issues with this designation is strong.
However, the relative degree of safety is not
as high as for issues designated A-1.
Supplementary Description of Interest Rate
Futures Contracts and Related Options
Characteristics of Futures Contracts.
Currently, futures contracts can be purchased
and sold on such securities as U.S. Treasury
bonds, U.S. Treasury notes, GNMAs and U.S.
Treasury bills. Unlike when the Fund
purchases or sells a security, no price is
paid or received by the Fund upon the
purchase or sales of a futures contract. The
Fund will initially be required to deposit
with the custodian or the broker an amount of
"initial margin" of cash of U.S. Treasury
bills. The nature of initial margin in
futures transactions is different from that
of margin in security transactions in that
futures contract initial margin does not
involve the borrowing of funds by their
customer to finance the transaction. Rather,
the initial margin is in the nature of a
performance bond or good faith deposit on the
contract which is returned to the Fund upon
termination of the futures contract, assuming
all contractual obligations have been
satisfied. Subsequent payments, called
maintenance margin, to and from the broker,
will be made on a daily basis as the price of
the underlying debt security fluctuates,
making the long and short positions in the
futures contract more or less valuable, a
process known as "marked-to-market." For
example, when the Fund has purchased a
futures contract and the price of the
underlying debt security has risen, that
position will have increased in value and the
Fund will receive from the broker a
maintenance margin payment equal to that
increase in value. Conversely, when the Fund
has purchased a futures contract and the
price of the underlying debt security has
declined, the position would be less valuable
and the Fund would be required to make a
maintenance margin payment to the broker. At
any time prior to expiration of the futures
contract, the Fund may elect to close the
position by taking an opposite position which
will operate to terminate the Fund's position
in the futures contract. A final
determination of maintenance margin is then
made, additional cash is required to be paid
by or released to the Fund, and the Fund
realizes a loss or a gain.
While futures contracts based on debt
securities do provide for the delivery and
acceptance of securities, such deliveries and
acceptances are very seldom made. Generally,
the futures contract is terminated by
entering into an offsetting transaction. An
offsetting transaction for a futures contract
sale is effected by the Fund entering into a
futures contract purchase for the same
aggregate amount of the specific type of
financial instrument and same delivery date.
If the price in the sale exceeds the price in
the offsetting purchase, the Fund pays the
difference and realizes the loss. Similarly,
the closing out of a futures contract
purchase is effected by the Fund entering
into a futures contract sale. If the
offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting price,
the Fund realizes a loss.
Risks of Transactions in Futures Contracts.
There are several risks in connection with
the use of futures contracts by Government
Securities Fund as a hedging device. One
risk arises because of the imperfect
correlation between movements in the price of
the futures contracts and movements in the
price of the debt securities which are the
subject of the hedge. The price of the
futures contract may move more than or less
than the price of the debt securities being
hedged. If the price of the futures contract
moves less than the price of the securities
which are the subject of the hedge, the hedge
will not be fully effective, but, if the
price of the securities being hedged has
moved in an unfavorable direction, the Fund
would be in a better position than if it has
not hedged at all. If the price of the
securities being hedged has moved in a
favorable direction, this advantage will be
partially offset by the movement in the price
of the futures contract. If the price of the
futures contracts moves more than the price
of the security, the Fund will experience
either a loss or a gain on the future which
will not be completely offset by movements in
the prices of the debt securities which are
the subject of the hedge. To compensate for
the imperfect correlation of movements in the
price of debt securities being hedged and
movements in the prices of the futures
contracts, the Fund may buy or sell futures
contracts in a greater dollar amount of the
securities being hedged if the historical
volatility of the prices of such securities
has been greater than the historical
volatility of the futures contracts.
Conversely, the Fund may buy or sell fewer
futures contracts if the historical
volatility of the price of the securities
being hedged is less than the historical
volatility of the futures contracts. It is
also possible that, where the Fund has sold
futures to hedge its portfolio against
decline in the market, the market may advance
and the value of securities held in the
Fund's portfolio may decline. If this
occurred, the Fund would lose money on the
futures contracts and also experience a
decline in value in its portfolio securities.
However, while this could occur for a very
brief period or to a very small degree, over
time the value of a diversified portfolio
will tend to move in the same direction as
the futures contracts. Where futures are
purchased to hedge against a possible
increase in prices of securities before the
Fund is able to invest its cash (or cash
equivalents) in U.S. government securities
(or options) in an orderly fashion, it is
possible that the market may decline instead;
if the Fund then concludes not to invest in
U.S. government securities or options at that
time because of concern as to possible
further market decline or for other reasons,
the Fund will realize a loss on the futures
contract that is not offset by a reduction in
the price of securities purchased.
In addition to the possibility that there may
be an imperfect correlation, or no
correlation at all, between movements in the
futures contracts and the portion of the
portfolio being hedged, the market prices of
futures contracts may be affected by certain
factors. First, all participants in the
futures market are subject to margin deposit
and maintenance requirements. Rather than
meeting additional margin deposit
requirements, investors may close futures
contracts though offsetting transactions
which could distort the normal relationship
between the debt securities and futures
markets; second, from the point of view of
speculators, the deposit requirements in the
futures market are less onerous than margin
requirements in the securities market.
Therefore, increased participation by
speculators in the futures market may also
cause temporary price distortions. Due to
the possibility of price distortion in the
futures market and because of the imperfect
correlation between movements in the debt
securities and movements in the prices of
futures contracts, a correct forecast of
interest rate trends by the investment
advisor may still not result in a successful
hedging transaction over a very short time
frame.
Positions in futures contracts may be closed
out only on an exchange or board of trade
which provides a secondary market for such
futures. Although Government Securities Fund
intends to purchase or sell futures only on
exchanges or boards of trade where there
appears to be an active secondary market,
there is no assurance that a liquid secondary
market on an exchange or board of trade will
exist for any particular contract or at any
particular time. In such event, it may not
be possible to close a futures position, and
in the event of adverse price movements, the
Fund would continue to be required to make
daily cash payments of variation margin.
However, in the event that the futures
contracts have been used to hedge portfolio
securities, such securities will not be sold
until the futures contracts can be
terminated. In such circumstances, an
increase in the price of the securities, if
any, may partially or completely offset
losses on the futures contracts. However, as
described above, there is no guarantee that
the price of the securities will, in fact,
correlate with the price movements of the
futures contracts and thus provide an offset
to losses on futures contracts. Successful
use of futures contracts by the Fund is also
subject to the investment adviser's ability
to predict correctly movements in the
direction of interest rates and other factors
affecting markets of debt securities. For
example, if the Fund has hedged against the
possibility of an increase in interest rates
which would adversely affect debt securities
held in its portfolio and prices of such
securities increase instead, the Fund will
lose part or all of the benefit of the
increased value of its securities which it
has hedged because it will have offsetting
losses in its futures positions. In
addition, in such situations, if the Fund has
insufficient cash, it may have to sell
securities to meet daily variation margin
requirements. Such sale of securities may
be, but will not necessarily be, at increased
prices which reflect the rising market. The
Fund may have to sell securities at a time
when it may be disadvantageous to do so.
Characteristics of Options on Futures
Contracts. As with options on debt
securities, the holder of an option may
terminate his position by selling an option
of the same series. There is no guarantee
that such closing transactions can be
effected. The Fund will be required to
deposit initial margin and maintenance margin
with respect to put and call options on
futures contracts described above, and, in
addition, net option premiums received will
be included as initial margin deposits.
In addition to the risks which apply to all
options transaction, there are several
special risks relating to options on futures
contracts. Trading in such options commenced
in October 1982. The ability to establish
and close out positions on such options will
be subject to the development and maintenance
of a liquid secondary market. It is not
certain that this market will develop. The
Fund will not purchase options on futures
contracts on any exchange unless and until,
in the investment advisor's opinion, the
market for such options had developed
sufficiently that the risks in connection
with options on futures contracts are not
greater than the risks in connection with
futures contracts. Compared to the use of
futures contracts, the purchase of options on
futures contracts involves less potential
risk to the Fund because the maximum amount
of risk is the premium paid for the options
(plus transaction costs). However, there may
be circumstances when the use of an option on
a futures contract would result in a loss to
the Fund when the use of a futures contract
would not, such as when there is no movement
in the prices of debt securities. Writing an
option on a futures contract involves risks
similar to those arising in the sale of
futures contracts, as described above.
Smith Barney
Investment Funds Inc.
44
SMITH BARNEY INVESTMENT FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Not Applicable
Included in Part B:
(b) Exhibits
All references are to the Registrant's registration statement on Form N-1A
(the "Registration Statement") as filed with the SEC on October 2, 1981
(File Nos. 2-74288 and 811-3275).
(1) Articles of Restatement dated September 17, 1993 to Registrant's Articles
of Incorporation dated September 28, 1981, Articles of Amendment dated
October 14, 1994, Articles Supplementary, Articles of Amendment dated
October 14, 1994, Articles Supplementary, Articles of Amendments and
Certificates of Correction dated November 7, 1994, are incorporated by
reference to Post-Effective Amendment No. 37 to the Registration Statement
filed on November 7, 1994. 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 (filed herewith).
(2) Registrant's By-Laws, as amended on September 30, 1992 are incorporated by
reference to Post-Effective Amendment No. 30 to the Registration Statement
filed on April 30, 1993.
(3) Not Applicable.
(4) Registrant's form of stock certificate for 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.
(5) (a) Investment Advisory Agreement dated July 30, 1993, between the
Registrant on behalf of Smith Barney Investment Grade Bond Fund,
Smith Barney Government Securities Fund and Smith Barney Special Equities
Fund and Greenwich Street Advisors is incorporated by reference to the
Registration Statement filed on Form N-14 on September 2, 1993, File
No. 33-50153.
(b) Investment Advisory Agreements on behalf of Smith Barney Growth
Opportunity Fund and Smith Barney Managed Growth Fund is incorporated by
reference to Post-Effective Amendment No. 40 filed on June 27, 1995.
(c) 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) Sub-Advisory Agreement on behalf of Global Value Fund and Global Small
Cap Fund between MMC and Hansberger Global Investors Inc. will be filed by
amendment.
(6) (a) Distribution Agreement dated July 30, 1993, between the Registrant and
Smith Barney Shearson Inc. is incorporated by reference to the registration
statement filed on Form N-14 on September 2, 1993. File 33-50153.
(b) Form of Distribution Agreement between the Registrant and PFS
Distributors on behalf of Smith Barney Investment Funds Inc. is incorporated
by reference to Post-Effective Amendment No. 40 filed on June 27, 1995.
(7) Not Applicable.
8 (a) Custodian Agreement with PNC Bank, National Association is incorporated by
reference to Post -Effective Amendment No. 44 filed on April 29, 1997.
(b) Custodian Agreement with Chase Manhattan Bank is incorporated by
reference to Post-Effective Amendment No. 46.
9 (a) 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").
(b) Sub-Transfer Agency Agreement between the Registrant and PFS Shareholders
Services on behalf of Smith Barney Investment Funds Inc. is incorporated by
reference to Post-Effective Amendment No. 40 filed on June 27, 1995.
(10) Opinion of Robert A. Vegliante, Deputy General Counsel of Smith Barney
Mutual Funds Management Inc. filed with the Registrant's rule 24-f2 Notice
(Accession No. 000091155-97-000104) is incorporated by reference.
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) (a) Amended Services and Distribution Plans pursuant to Rule 12b-1 between
the Registrant on behalf of Smith Barney Invest Grade Bond Fund, Smith Barney
Government Securities Fund, Smith Barney Special Equities Fund and Smith Barney
European Fund and Smith Barney, Inc. ("Smith Barney") are incorporated by
reference to Post-Effective Amendment No. 37'
(b) Form of Services and Distribution Plans pursuant to Rule 12b-1 between
the Registrant on behalf of Smith Barney Growth Opportunity Fund and Smith
Barney Managed Growth Fund is incorporated by reference to Post-Effective
Amendment No. 40 filed on June 27, 1995.
(c) 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.
(16) Performance Date is incorporated by reference to Post-Effective Amendment
No. 22 as filed on May 1, 1989.
(17) Not Applicable
(18) Plan pursuant to Rule 18f-3 is incorporated by reference to Post-Effective
Amendment No.42 to Registration Statement dated January 10, 1996.
Item 25 Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Not Applicable
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1 to the registration statement filed on Form N-14 on
October 8, 1993 (File No. 33-50153).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser -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 Travelers Group Inc. (formerly known as
Primerica Corporation) ("Travelers"). 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 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney ") acts as principal underwriter for
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
Greenwich Street Series Fund
High Income Opportunity Fund Inc.
The Italy Fund Inc.
Managed High Income Portfolio Inc.
Managed Municipals Portfolio II Inc.
Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc.
Puerto Rico Daily Liquidity Fund Inc.
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 Intermediate Municipal Fund, Inc.
Smith Barney Investment Funds 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 Fund, Inc.
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.
Smith Barney Worldwide Special Fund N.V. (Netherlands Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V.(Netherlands Antilles)
Worldwide Securities Limited (Bermuda)
Zenix Income Fund Inc. and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings. The information
required by this Item 29 with respect to each director, officer and partner of
Smith Barney is incorporated by reference to Schedule A of Form BD filed by
Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC File No.
812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Funds Inc.
388 Greenwich Street
New York, New York 10013
(2) 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
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(b) The Registrant hereby undertakes to file a post-effective amendment,
which includes financial statements, within four to six month from the
effective date of this Registration Statement.
(c) The Registrant hereby undertakes to furnish to each person to whom a
prospectus of any series of the Registrant is delivered a copy of the
Registrant's latest annual report, upon request and without charge.
(d) Registrant further represents pursuant to Rule 485(b)(4) that the
resignation of Mr. Alger B. Chapman as a Director of the Registrant was
not due to any disagreement with the Registrant on any matter relating to its
operation, policies or practices. Mr. Chapman resigned because of a
change in his professional obligations,
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 27th day
of February, 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 02/27/98
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President
Lewis E. Daidone and Treasurer 02/27/98
(Chief Financial
and Accounting Officer)
/s/ Paul R. Ades * Director 02/27/98
Paul R. Ades
/s/ Herbert Barg* Director 02/27/98
Herbert Barg
/s/ Dwight B. Crane* Director 02/27/98
Dwight B. Crane
/s/ Frank Hubbard* Director 02/27/98
Frank Hubbard
/s/ Ken Miller* Director 02/27/98
Ken Miller
/s/ John F. White* Director 02/27/98
John F. White
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact, pursuant
to power of attorney dated November 3, 1994.
/s/ Heath B. McLendon
Heath B. McLendon
