<PAGE>
Smith Barney Mutual Funds
PROSPECTUS
Premier
Selections Fund
Class A, B, L and Y Shares
------------------------------------
July 16, 1999
The Securities and Exchange Commission has not approved or disapproved
these securities or determined whether this prospectus is accurate or
complete. Any statement to the contrary is a crime.
<PAGE>
Premier Selections Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 7
Management.................................................................. 8
Limited offering............................................................ 9
Subscription offering period................................................ 9
Quarterly open periods...................................................... 9
Choosing a class of shares to buy........................................... 10
Comparing the fund's classes................................................ 11
Sales charges............................................................... 12
More about deferred sales charges........................................... 14
Buying shares............................................................... 15
Exchanging shares........................................................... 16
Redeeming shares............................................................ 18
Other things to know about share transactions............................... 20
Dividends, distributions, and taxes......................................... 22
Share price................................................................. 23
</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Investment objective
Long-term capital growth.
Principal investment strategies
Key investments The fund invests primarily in companies with large market capi-
talizations--those with total market capitalizations of $5 billion or more at
the time of investment. The fund's holdings will be comprised of stocks of
approximately 40 companies.
There can be no assurance that the fund will achieve its investment objective.
Selection process The fund's strategy is to combine the efforts of two
portfolio managers with different styles (value and growth) and to invest in
the most attractive stock selections in the opinion of each portfolio manager.
Each portfolio manager builds a portfolio of stocks which he or she believes
will offer superior long-term capital growth potential. Each portfolio manager
may select up to 20 stocks. In connection with the execution of purchases and
sales, each portfolio manager may hold temporarily more or fewer than 20
securities. The size of the fund's position in any particular security will be
determined by SSBC Fund Management Inc. (the "Manager") based on the
recommendation of the portfolio managers.
In order to maintain an approximately equal division of all of the fund's
assets between the two portfolio managers, the Manager will:
.Divide all daily cash inflows (purchases and reinvested distributions) and
outflows (redemptions and expense items) between the two portfolio managers
.Rebalance the assets available for investment by each portfolio manager quar-
terly to take account of market fluctuations in order to maintain the approx-
imately equal allocation
.Rebalance the allocation of value and growth securities in the fund's portfo-
lio at any time in which the percentage of the fund's portfolio invested in
either value or growth securities equals or exceeds 55% of the fund's total
assets invested in both value and growth securities for a period of more than
10 days
As a consequence of the rebalancing of assets described above, the Manager will
reallocate assets from the better performing investment style to the other.
Reallocations may result in early recognition of taxable gains and in
Premier Selections Fund
2
<PAGE>
additional transaction costs to the extent that the sales of securities as part
of these reallocations result in higher portfolio turnover. In addition, if one
portfolio manager buys a security during a time frame when the other portfolio
manager sells it, the net position of the fund in the security may be approxi-
mately the same as it would have been with a single portfolio manager and no
such sale and purchase. The Manager will consider these costs in determining
the allocation and reallocation of assets. Where possible, in these instances,
the Manager will seek to avoid transaction costs.
Growth Style The portfolio manager emphasizes individual security selection.
The portfolio manager attempts to identify established large capitalization
companies with the highest growth potential. The portfolio manager then ana-
lyzes each company in detail, focusing on its management, strategy and competi-
tive market position. Finally, the portfolio manager attempts to identify the
most attractively priced securities among the growth companies identified.
In selecting individual companies for investment, the portfolio manager consid-
ers:
.Above average growth prospects
.Technological innovation
.Industry dominance
.Competitive products and services
.Global scope
.Long term operating history
.Strong cash flow
.High return on equity
.Strong financial condition
.Experienced and effective management
Value Style The portfolio manager employs a two-step stock selection process in
the search for undervalued stocks of established, well recognized but temporar-
ily out of favor companies. First, the portfolio manager uses proprietary mod-
els and fundamental research to identify stocks that are underpriced in the
market relative to their estimated value. Next, the portfolio manager looks for
a positive catalyst in the company's near term outlook which the portfolio man-
ager believes will accelerate earnings and positively change the market's view
of the company's prospects.
In selecting individual companies for investment, the portfolio manager looks
for:
.Low market valuations measured by the portfolio manager's valuation models
.Above market dividend yields and established dividend records
Smith Barney Mutual Funds
3
<PAGE>
.Positive changes in earnings prospects because of factors such as:
.New management
.New product development or a change in competitive position
.A new business strategy not yet recognized by the marketplace
.Regulatory changes favoring the company
.Improving returns on invested capital and cash flow
.Liquidity
Principal risks of investing in the fund
Investors could lose money on their investments in the fund, or the fund may
not perform as well as other investments, if:
.U.S. stock markets go down, or perform poorly relative to other types of
investments
.An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the fund invests
.Large capitalization stocks fall out of favor with investors
.The portfolio manager's judgment about the attractiveness, growth prospects or
potential appreciation of a particular stock proves to be incorrect
.One style (value or growth) underperforms for an extended period, while the
fund's process allocates and reallocates assets to be managed by investing in
this style
The fund is non-diversified, which means that the fund may invest more than 5%
of its assets in the securities of any one issuer. Investing in a non-diversi-
fied fund, particularly a fund which may invest in the securities of only
approximately 40 companies, may entail greater risk than is normally associated
with more widely diversified funds.
Who may want to invest The fund may be an appropriate investment if you:
.Are seeking to participate in the long-term growth potential of the U.S. stock
market
.Are looking for an investment with potentially greater return but higher risk
than fixed income investments
.Are willing to accept the risks of the stock market
.Wish to invest indirectly in selected large companies
Premier Selections Fund
4
<PAGE>
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares. Annual fund operating expense figures are based on estimated expenses
for the fiscal period ending April 30, 2000.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price) 5.00% None 1.00% None
Maximum deferred sales charge (load) (as a %
of the lower of net asset value at purchase or
redemption) None* 5.00% 1.00% None
Annual fund operating expenses
<CAPTION>
Expenses deducted from fund assets Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Management fee 0.75% 0.75% 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00% None
Other expenses 0.20% 0.20% 0.20% 0.20%
----- ----- ----- -----
Total annual fund operating expenses 1.20% 1.95% 1.95% 0.95%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
Smith Barney Mutual Funds
5
<PAGE>
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Class A (with or without redemption) $616 $862
Class B (redemption at end of period) $698 $912
Class B (no redemption) $198 $612
Class L (redemption at end of period) $396 $706
Class L (no redemption) $296 $706
Class Y (with or without redemption) $ 97 $303
</TABLE>
Premier Selections Fund
6
<PAGE>
More on the fund's investments
Other investments While the fund intends to be substantially fully invested in
equity securities of large capitalization companies, the fund may invest a por-
tion of its assets in equity securities of companies with total market capital-
izations below $5 billion and in money market instruments and/or cash to pay
expenses and meet redemption requests.
The fund may also invest up to 10% of its assets (at the time of investment) in
foreign securities. The fund may invest directly in foreign issuers or invest
in depositary receipts. The fund's investments in foreign securities may
involve greater risk than investments in securities of U.S. issuers. Because
the value of a depositary receipt is dependent upon the market price of an
underlying foreign security, depositary receipts are subject to most of the
risks associated with investing in foreign securities directly. Foreign coun-
tries generally have markets that are less liquid and more volatile than mar-
kets in the U.S. In some foreign countries, less information is available about
foreign issuers and markets because of less rigorous accounting and regulatory
standards than in the U.S. Currency fluctuations could erase investment gains
or add to investment losses.
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
Master/feeder option The fund may in the future seek to achieve its investment
objective by investing all of its net assets in another investment company hav-
ing the same investment objective and substantially the same investment poli-
cies and restrictions as those applicable to the fund. Shareholders of the fund
will be given at least 30 days prior notice of any such investment.
Smith Barney Mutual Funds
7
<PAGE>
Management
Manager The fund's Manager is SSBC Fund Management Inc., an affiliate of Salo-
mon Smith Barney Inc. The Manager's address is 388 Greenwich Street, New York,
New York 10013. The Manager selects the fund's investments and oversees its
operations. The Manager and Salomon Smith Barney are subsidiaries of Citigroup
Inc. Citigroup businesses produce a broad range of financial services--asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world.
Alan Blake, investment officer of the Manager and managing director of Salomon
Smith Barney, is the portfolio manager responsible for the day-to-day manage-
ment of the fund's growth style investments. Mr. Blake has more than 20 years
of securities business experience.
Frances A. Root, investment officer of the Manager and managing director of
Salomon Smith Barney, is the portfolio manager responsible for the day- to-day
management of the fund's value style investments. Ms. Root has 19 years of
securities business experience.
The Manager will monitor the fund's investments to ensure that the fund
complies with its investment policies. The Manager will rebalance the alloca-
tion of value and growth securities in the fund's portfolio at the end of each
quarter and at any time in which the percentage of the fund's portfolio
invested in either value or growth securities equals or exceeds 55% of the
fund's total assets invested in both value and growth securities for a period
of more than 10 days. The Manager will also monitor the fund's portfolio to
ensure that no more than 25% of the fund's assets are concentrated in the secu-
rities of companies in the same industry.
Management fees The Manager will be paid an advisory fee equal to 0.75% of the
fund's average daily net assets.
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells fund shares to the public.
Distribution plans The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and
Premier Selections Fund
8
<PAGE>
service fees. These fees are an ongoing expense and, over time, may cost you
more than other types of sales charges.
Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The Manager and Salomon Smith Barney are addressing the
Year 2000 issue for their systems. The fund has been informed by other service
providers that they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund (limited to requesting and receiving reports from its
service providers) or its service providers to correct the problem will be suc-
cessful.
Limited offering
Unlike most mutual funds which make their shares available for investment on a
continuous basis, shares of the fund are expected to be offered to persons not
currently invested in the fund only during the subscription offering period and
the quarterly open periods. Current shareholders in the fund may buy additional
shares on any business day. Of course, shares may be redeemed on any business
day.
Subscription offering period
Salomon Smith Barney and other broker-dealers in the selling group will solicit
subscriptions for shares of the fund during the initial offering period, which
is scheduled to end on August 25, 1999. On the third business day after termi-
nation of the initial offering period, subscriptions for the shares will be
payable, shares will be issued and the fund will commence investment opera-
tions. No additional shares of the fund will be sold to persons not currently
invested in the fund until the first quarterly open period, expected to be in
December 1999.
Quarterly open periods
Although subject to change at any time by the Manager, it is expected currently
that shares of the fund will be offered to new shareholders only during the two
week period beginning on the first Monday of the third month of each calendar
quarter (March, June, September and December) and ending on Friday of the fol-
lowing week.
Smith Barney Mutual Funds
9
<PAGE>
Choosing a class of shares to buy
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
.If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
.For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
.Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class
L shares do not, Class B shares may be more attractive to long-term invest-
ors.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
Initial Additional
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
IRAs, Self Employed Retirement Plans,
Uniform Gift to Minor Accounts $250 $15 million $50
Qualified Retirement Plans* $25 $15 million $25
Simple IRAs $1 n/a $1
</TABLE>
* Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans
Premier Selections Fund
10
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
- ------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
5.00%;
reduced for
large pur-
chases and
waived for
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
- ------------------------------------------------------------------------
Deferred sales charge 1.00% on Up to 5.00% 1.00% if None
purchases charged you redeem
of $500,000 when you within 1
or more if redeem year of
you redeem shares. The purchase
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
- ------------------------------------------------------------------------
Annual distribution and 0.25% of 1.00% of 1.00% of None
service fees average average average
daily net daily net daily net
assets assets assets
- ------------------------------------------------------------------------
Exchangeable into* Class A Class B Class L Class Y
shares of shares of shares of shares of
most Smith most Smith most Smith most Smith
Barney Barney Barney Barney
funds funds funds funds
- ------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds
11
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 5.00 5.26
$25,000 but less than $50,000 4.00 4.17
$50,000 but less than $100,000 3.50 3.63
$100,000 but less than $250,000 3.00 3.09
$250,000 but less than $500,000 2.00 2.04
$500,000 or more -0- -0-
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of
1.00%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
.Accumulation privilege - lets you combine the current value of Class A shares
owned
.by you, or
.by members of your immediate family
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
.Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales
Premier Selections Fund
12
<PAGE>
charge, if any, as if all shares had been purchased at once. You may include
purchases on which you paid a sales charge made within 90 days before you
sign the letter.
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
.Employees of members of the NASD
.403(b) or 401(k) retirement plans, if certain conditions are met
.Clients of newly employed Salomon Smith Barney Financial Consultants, if cer-
tain conditions are met
.Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").
Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
6th through
Year after purchase 1st 2nd 3rd 4th 5th 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial purchase On reinvestment of Upon exchange from
dividends and another Smith
distributions Barney fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
(excluding shares
issued as a
dividend)
</TABLE>
Smith Barney Mutual Funds
13
<PAGE>
Class L shares
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1.00% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1.00%. Until June 22, 2001, purchases of Class L shares by
investors who were holders of Class C shares of other Smith Barney mutual funds
on June 12, 1998 will not be subject to the 1.00% initial sales charge.
Class Y shares
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore, you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.
Premier Selections Fund
14
<PAGE>
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
.On certain distributions from a retirement plan
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
Consultant or If you do not provide the following information, your order
dealer will be rejected
representative
.Class of shares being bought
.Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account
no later than the third business day after you place your
order. Salomon Smith Barney or your dealer representative may
charge an annual account maintenance fee.
- --------------------------------------------------------------------------------
Through the Qualified retirement plans and certain other investors who
fund's transfer are clients of the selling group are eligible to buy shares
agent directly from the fund.
.Write the transfer agent at the following address:
Premier Selections Fund Smith Barney Investment Funds
Inc.
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
.Enclose a check to pay for the shares. For initial pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.
Smith Barney Mutual Funds
15
<PAGE>
Through a Shares of the fund are not currently available under the sys-
systematic tematic investment plan generally offered to shareholders of
investment other Smith Barney funds.
plan
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the .You may exchange shares only for shares of the same class of
varying needs another Smith Barney fund. Not all Smith Barney funds offer
of both large all classes.
and small .Not all Smith Barney funds may be offered in your state of
investors residence. Contact your Salomon Smith Barney Financial Con-
sultant, dealer representative or the transfer agent for
further information.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
- --------------------------------------------------------------------------------
By telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete an authorization form to authorize telephone transfers.
If eligible, you may make tele-
Premier Selections Fund
16
<PAGE>
phone exchanges on any day the New York Stock Exchange is
open. Call the transfer agent at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m. (Eastern time). Requests received after
the close of regular trading on the Exchange are priced at
the net asset value next determined.
You can make telephone exchanges only between accounts that
have identical registrations.
- --------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the next page.
Smith Barney Mutual Funds
17
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However,
if you recently purchased your shares by check, your redemp-
tion proceeds will not be sent to you until your original
check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written requests
to the transfer agent at the following address:
Premier Selections Fund Smith Barney Investment Funds Inc.
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
.Your account number
.The class of shares and the dollar amount or number of
shares to be redeemed
.Signatures of each owner exactly as the account is regis-
tered
Premier Selections Fund
18
<PAGE>
By telephone If you do not have a brokerage account, you may be eligible
to redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent. You
must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by tel-
ephone on any day the New York Stock Exchange is open. Call
the transfer agent at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m. (Eastern time). Requests received after the close
of regular trading on the Exchange are priced at the net
asset value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You must submit a new authorization
form to change the bank account designated to receive wire
transfers and you may be asked to provide certain other docu-
ments.
Smith Barney Mutual Funds
19
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:
.Name of the fund
.Account number
.Class of shares being bought, exchanged or redeemed
.Dollar amount or number of shares being bought, exchanged or redeemed
.Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal identification number for the account, sending you a written confirmation
or requiring other confirmation procedures from time to time.
Signature guarantees To be in good order, your redemption request must include
a signature guarantee if you:
.Are redeeming over $10,000 of shares
.Are sending signed share certificates or stock powers to the transfer agent
.Instruct the transfer agent to mail the check to an address different from the
one on your account
.Changed your account registration
.Want the check paid to someone other than the account owner(s)
.Are transferring the redemption proceeds to an account with a different regis-
tration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
The fund has the right to:
.Engage in a continuous offering, to suspend sales or otherwise to modify the
quarterly open periods, at the discretion of the Manager
.Waive or change minimum and additional investment amounts
.Reject any purchase or exchange order
.Change, revoke or suspend the exchange privilege
.Suspend telephone transactions
Premier Selections Fund
20
<PAGE>
.Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions The Manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other share-
holders. If so, the fund may limit additional purchases and/or exchanges by the
shareholder.
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.
Smith Barney Mutual Funds
21
<PAGE>
Dividends, distributions and taxes
Dividends The fund pays dividends from its net investment income and makes cap-
ital gain distributions, if any, once a year, typically in December. The fund
may pay additional distributions and dividends at other times if necessary for
the fund to avoid a federal tax. Capital gain distributions and dividends are
reinvested in additional fund shares of the same class you hold. The fund
expects distributions to be primarily from capital gains. You do not pay a
sales charge on reinvested distributions or dividends. Alternatively, you can
instruct your Salomon Smith Barney Financial Consultant, dealer representative
or the transfer agent to have your distributions and/or dividends paid in cash.
You can change your choice at any time to be effective as of the next distribu-
tion or dividend, except that any change given to the transfer agent less than
five days before the payment date will not be effective until the next distri-
bution or dividend is paid.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status
<S> <C>
Redemption or exchange of shares Usually capital gain or
loss; long-term only if
shares owned more than
one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a capital gain distribution or
a dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.
After the end of each year, the fund will provide you with information about
the distributions and dividends you received and any redemptions of shares dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
Premier Selections Fund
22
<PAGE>
Share price
Current shareholders may buy, exchange or redeem shares at their net asset val-
ue, plus any applicable sales charge, next determined after receipt of a
request in good order. Persons not currently invested in the fund may buy, or
exchange into, shares of the fund only during the quarterly open periods. The
fund's net asset value is the value of its assets minus its liabilities. Net
asset value is calculated separately for each class of shares. The fund calcu-
lates its net asset value every day the New York Stock Exchange is open. The
Exchange is closed on certain holidays listed in the SAI. This calculation is
done when regular trading closes on the Exchange (normally 4:00 p.m., Eastern
time).
The fund generally values its fund securities based on market prices or quota-
tions. When reliable market prices or quotations are not readily available, the
fund may price those securities at fair value. Fair value is determined in
accordance with procedures approved by the fund's board. A fund that uses fair
value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders
to buy, exchange or redeem shares to the fund's agent before the agent's close
of business.
Smith Barney Mutual Funds
23
<PAGE>
(This page is intentionally left blank.)
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Premier Selections Fund
A series of Smith Barney Investment Funds Inc.
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the Commis-
sion, Washington, D.C. 20549-6009. Information about the public reference room
may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-3275)
FD 2320 7/99
<PAGE>
Smith Barney
Premier Selections Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
- -------------------------------------
Statement of Additional Information July 16, 1999
- -------------------------------------
This Statement of Additional Information ("SAI") expands upon and supplements
the information contained in the current Prospectus of Smith Barney Premier
Selections Fund (the "Fund") dated July 16, 1999, as amended or supplemented
from time to time, and should be read in conjunction with the Fund's Prospectus.
The Fund is a series of Smith Barney Investment Funds Inc. (the "Company"). The
Fund's Prospectus may be obtained from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or telephone number
set forth above. This SAI, although not in itself a prospectus, is incorporated
by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES.............. 2
INVESTMENT RESTRICTIONS................................... 12
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........... 14
PURCHASE OF SHARES........................................ 19
REDEMPTION OF SHARES...................................... 25
VALUATION OF SHARES....................................... 26
EXCHANGE PRIVILEGE........................................ 27
PERFORMANCE DATA.......................................... 28
DIVIDENDS, DISTRIBUTIONS AND TAXES........................ 30
ADDITIONAL INFORMATION.................................... 35
FINANCIAL STATEMENTS...................................... 36
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the Fund's investment objective and policies. This
section contains supplemental information concerning the types of securities and
other instruments in which the Fund may invest, the investment policies and
portfolio strategies the Fund may utilize and certain risks associated with
these investments, policies and strategies. SSBC Fund Management Inc. ("SSBC"
or the "Manager") serves as investment manager to the Fund.
The Fund normally invests at least 65% of its total assets in equity securities
of large capitalization companies that are significant factors in their
industries, usually global in scope and have a long-term history of performance.
The Fund does have the flexibility, however, to invest the balance in companies
with smaller market capitalizations. The Fund defines large market
capitalization companies as those with market capitalization of $5 billion or
more at the time of the Fund's investment. Companies whose capitalization falls
below this level after purchase will continue to be considered large
capitalization companies for purposes of the 65% policy.
Under normal market conditions, the majority of the Fund's portfolio will
consist of common stock, but it also may contain money market instruments for
cash management purposes. The Fund reserves the right, as a defensive measure,
to hold money market securities, including repurchase agreements or cash, in
such proportions as, in the opinion of management, prevailing market or economic
conditions warrant.
Equity Securities. The Fund will normally invest at least 65% of its assets in
equity securities, including primarily common stocks and, to a lesser extent,
securities convertible into common stock and rights to subscribe for common
stock. Common stocks represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.
When-Issued Securities and Delayed-Delivery Transactions. The Fund may purchase
securities on a "when-issued" basis, for delayed delivery (i.e., payment or
delivery occur beyond the normal settlement date at a stated price and yield) or
on a forward commitment basis. The Fund does not intend to engage in these
transactions for speculative purposes, but only in furtherance of its investment
goal. These transactions occur when securities are purchased or sold by the
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Because of fluctuations in the value of securities purchased or
sold on a when-issued, delayed-delivery basis or forward commitment basis, the
prices obtained on such securities may be higher or lower than the prices
available in the market on the dates when the investments are actually delivered
to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery securities, the
Fund will set aside cash or liquid securities equal to the amount of the
commitment in a segregated account on the Fund's books. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case the Fund may be required subsequently to place additional assets in
the segregated account in order to ensure that the value of the account remains
equal to the
2
<PAGE>
amount of the Fund's commitment. The assets contained in the segregated account
will be marked-to-market daily. It may be expected that the Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When the Fund
engages in when-issued or delayed-delivery transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Foreign Securities. The Fund may invest in securities of foreign issuers. Such
investments involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include currency exchange control
regulations and costs, the possibility of expropriation, seizure, or
nationalization of foreign deposits, less liquidity and volume and more
volatility in foreign securities markets and the impact of political, social,
economic or diplomatic developments or the adoption of other foreign government
restrictions that might adversely affect the payment of principal and interest
on or market value of securities. If it should become necessary, the Fund might
encounter greater difficulties in invoking legal processes abroad than would be
the case in the United States. In addition, there may be less publicly
available information about a non-U.S. company, and non-U.S. companies are not
generally subject to uniform accounting and financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
Furthermore, some of these securities may be subject to foreign brokerage and
withholding taxes.
The Fund may also invest in securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or
similar securities representing interests in the common stock of foreign
issuers. Management intends to limit the Fund's investment in these types of
securities to 10% of the Fund's net assets. ADRs are receipts, typically issued
by a U.S. bank or trust company, which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs, in registered
form, are designed for use in the U.S. securities markets and EDRs are designed
for use in European securities markets. The underlying securities are not
always denominated in the same currency as the ADRs or EDRs. Although investment
in the form of ADRs or EDRs facilitates trading in foreign securities, it does
not mitigate the risks associated with investing in foreign securities.
However, by investing in ADRs or EDRs rather than directly in foreign issuers'
stock, the Portfolio can avoid currency risks during the settlement period for
either purchases or sales. In general, there is a large, liquid market in the
United States for many ADRs and EDRs. The information available for ADRs and
EDRs is subject to the accounting, auditing and financial reporting standards of
the domestic market or exchange on which they are traded, which standards are
more uniform and more exacting that those to which many foreign issuers may be
subject.
Investments in foreign securities incur higher costs than investments in U.S.
securities, including higher costs in making securities transactions as well as
foreign government taxes which may reduce the investment return of the Fund. In
addition, foreign investments may include additional risks associated with
currency exchange rates, less complete financial information about individual
companies, less market liquidity and political instability.
3
<PAGE>
Money Market Instruments. The Fund may invest for temporary defensive purposes
in short-term corporate and government bonds and notes and money market
instruments. Money market instruments include: obligations issued or guaranteed
by the United States government, its agencies or instrumentalities ("U.S.
government securities"); certificates of deposit, time deposits and bankers'
acceptances issued by domestic banks (including their branches located outside
the United States and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar institutions; high
grade commercial paper; and repurchase agreements with respect to the foregoing
types of instruments. Certificates of deposit ("CDs") are short-term,
negotiable obligations of commercial banks. Time deposits ("TDs") are non-
negotiable deposits maintained in banking institutions for specified periods of
time at stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Repurchase Agreements. The Fund may agree to purchase securities from a bank or
recognized securities dealer and simultaneously commit to resell the securities
to the bank or dealer at an agreed-upon date and price reflecting a market rate
of interest unrelated to the coupon rate or maturity of the purchased securities
("repurchase agreements"). The Fund would maintain custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to would be, in effect, secured
by such securities. If the value of such securities were less than the
repurchase price, plus interest, the other party to the agreement would be
required to provide additional collateral so that at all times the collateral is
at least 102% of the repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose the Fund to possible loss because of adverse
market action, expenses and/or delays in connection with the disposition of the
underlying obligations. The financial institutions with which the Fund may
enter into repurchase agreements will be banks and non-bank dealers of U.S.
Government securities on the Federal Reserve Bank of New York's list of
reporting dealers, if such banks and non-bank dealers are deemed creditworthy by
the Fund's manager. The Manager will continue to monitor creditworthiness of the
seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement to equal at least 102% of the repurchase price (including accrued
interest). In addition, the Manager will require that the value of this
collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, be equal to 102% or greater than the
repurchase price (including accrued premium) provided in the repurchase
agreement or the daily amortization of the difference between the purchase price
and the repurchase price specified in the repurchase agreement. The Manager will
mark-to-market daily the value of the securities. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940, as
amended (the "1940 Act").
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements which involve the sale of Fund securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment and
have the characteristics of borrowing. Since the proceeds of borrowings under
reverse repurchase agreements are invested, this would introduce the speculative
factor known as "leverage." The securities purchased with the Funds obtained
from the agreement and securities collateralizing the agreement will have
maturity dates no later than the repayment date. Generally the effect of such a
transaction is that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income
4
<PAGE>
associated with those securities. Such transactions are only advantageous if the
Fund has an opportunity to earn a greater rate of interest on the cash derived
from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Fund intends to use the reverse repurchase technique only when the Manager
believes it will be advantageous to the Fund. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the value of the
Fund's assets. The Fund's custodian bank will maintain a separate amount for the
Fund with securities having a value equal to or greater than such commitments.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend portfolio securities to brokers, dealers and
other financial organizations that meet capital and other credit requirements or
other criteria established by the Board. The Fund will not lend portfolio
securities to affiliates of the Manager unless they have applied for and
received specific authority to do so from the Securities and Exchange Commission
("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 equal to at least 102% of the current market value of the loaned
securities. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the Fund.
From time to time, the Fund may return a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by continuing to
receive interest and any dividends on the loaned securities as well as by either
investing the collateral received for securities loaned 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. Although the generation of
income is not the primary investment goal of the Fund, income received could be
used to pay the Fund's expenses and would increase an investor's total return.
The Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 102% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Fund must be able to terminate the loan at any time; (iv) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower,
provided, however, that if a material event adversely affecting the investment
occurs, the Board must terminate the loan and regain the right to vote the
securities. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon a
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan.
Illiquid Securities. The Fund may invest up to an aggregate amount of 15% of
its net assets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that lack
readily available markets.
5
<PAGE>
Non-Diversified Classification. The Fund is classified as a non-diversified
fund under the 1940 Act which means the Fund is not limited by the Act in the
proportion of its assets it may invest in the obligations of a single issuer.
The Fund intends to conduct its operations, however, so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the Fund of any liability for
Federal income tax to the extent its earnings are distributed to shareholders.
To qualify as a regulated investment company, the Fund will, among other things,
limit its investments so that, at the close of each quarter of the taxable year
(a) not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer and (b) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer and the Fund
will not own more than 10% of the outstanding voting securities of a single
issuer.
Master/feeder fund structure. The Board of Trustees has the discretion to
retain the current distribution arrangement for the Fund while investing in a
master fund in a master/feeder fund structure. A master/feeder fund structure
is one in which a fund (a "feeder fund"), instead of investing directly in a
portfolio of securities, invests most or all of its investment assets in a
separate registered investment company (the "master fund") with substantially
the same investment objective and policies as the feeder fund. Such a structure
permits the pooling of assets of two or more feeder funds, preserving separate
identities or distribution channels at the feeder fund level. Based on the
premise that certain of the expenses of operating an investment portfolio are
relatively fixed, a larger investment portfolio may eventually achieve a lower
ratio of operating expenses to average net assets. An existing investment
company is able to convert to a feeder fund by selling all of its investments,
which involves brokerage and other transaction costs and realization of a
taxable gain or loss, or by contributing its assets to the master fund and
avoiding transaction costs and, if proper procedures are followed, the
realization of taxable gain or loss.
Options, Futures and Currency Strategies. The Fund may use forward currency
contracts and certain options and futures strategies to attempt to hedge its
portfolio, i.e., reduce the overall level of investment risk normally associated
with the Fund. There can be no assurance that such efforts will succeed.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission ("CFTC") require that the Fund enter into transactions in
futures contracts and options on futures only (i) for bona fide hedging purposes
(as defined in CFTC regulations), or (ii) for non-hedging purposes, provided the
aggregate initial margin and premiums on such non-hedging positions do not
exceed 5% of the liquidation value of the Fund's assets. To attempt to hedge
against adverse movements in exchange rates between currencies, the Fund may
enter into forward currency contracts for the purchase or sale of a specified
currency at a specified future date. Such contracts may involve the purchase or
sale of a foreign currency against the U.S. dollar or may involve two foreign
currencies. The Fund may enter into forward currency contracts either with
respect to specific transactions or with respect to its portfolio positions.
For example, when the Manager anticipates making a purchase or sale of a
security, it may enter into a forward currency contract in order to set the rate
(either relative to the U.S. dollar or another currency) at which
6
<PAGE>
the currency exchange transaction related to the purchase or sale will be made
("transaction hedging"). Further, when the Manager believes a particular
currency may decline compared to the U.S. dollar or another currency, the Fund
may enter into a forward contract to sell the currency the Manager expects to
decline in an amount approximating the value of some or all of the Fund's
securities denominated in that currency, or when the Manager believes one
currency may decline against a currency in which some or all of the portfolio
securities held by the Fund are denominated, it may enter into a forward
contract to buy the currency expected to decline for a fixed amount ("position
hedging"). In this situation, the Fund may, in the alternative, enter into a
forward contract to sell a different currency for a fixed amount of the currency
expected to decline where the investment Manager believes the value of the
currency to be sold pursuant to the forward contract will fall whenever there is
a decline in the value of the currency in which portfolio securities of the Fund
are denominated ("cross hedging"). The Fund places (i) cash, (ii) U.S.
Government securities or (iii) equity securities or debt securities (of any
grade) in certain currencies provided such assets are liquid, unencumbered and
marked to market daily, or other high-quality debt securities denominated in
certain currencies in a separate account of the Fund having a value equal to the
aggregate amount of the Fund's commitments under forward contracts entered into
with respect to position hedges and cross-hedges. If the value of the securities
placed in a separate account declines, additional cash or securities are placed
in the account on a daily basis so that the value of the amount will equal the
amount of the Fund's commitments with respect to such contracts.
For hedging purposes, the Fund may write covered call options and purchase put
and call options on currencies to hedge against movements in exchange rates and
on debt securities to hedge against the risk of fluctuations in the prices of
securities held by the Fund or which the Manager intends to include in its
portfolio. The Fund also may use interest rates futures contracts and options
thereon to hedge against changes in the general level in interest rates.
The Fund may write call options on securities and currencies only if they are
covered, and such options must remain covered so long as the Fund is obligated
as a writer. A call option written by the Fund is "covered" if the Fund owns
the securities or currency underlying the option or has an absolute and
immediate right to acquire that security or currency without additional cash
consideration (or for additional cash consideration held in a segregated account
on the Fund's books) upon conversion or exchange of other securities or
currencies held in its portfolio. A call option is also covered if the Fund
holds on a share-for-share basis a call on the same security or holds a call on
the same currency as the call written where the exercise price of the call held
is equal to less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, Treasury bills or other high-grade, short-term obligations in a
segregated account on the Fund's books.
The Fund may purchase put and call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. If the expected changes occur, the Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The risk assumed by the Fund in connection with such
transactions is limited to the amount of the premium and related transaction
costs associated with the option, although the Fund may lose such amounts if the
prices of securities underlying the options do not move in the direction or to
the extent anticipated.
7
<PAGE>
Although the portfolio may not use forward currency contracts, options and
futures, the use of any of these strategies would involve certain investment
risks and transaction costs. These risks include: dependence on the Manager's
ability to predict movements in the prices of individual debt securities,
fluctuations in the general fixed-income markets and movements in interest rates
and currency markets, imperfect correlation between movements in the price of
currency, options, futures contracts or options thereon and movements in the
price of the currency or security hedged or used for cover; the fact that skills
and techniques needed to trade options, futures contracts and options thereon or
to use forward currency contracts are different from those needed to select the
securities in which the Fund invests; lack of assurance that a liquid market
will exist for any particular option, futures contract or option thereon at any
particular time.
Over-the-counter options in which the Fund may invest differ from exchange
traded options in that they are two-party contracts, with price and other terms
negotiated between buyer and seller, and generally do not have as much market
liquidity as exchange-traded options. The Fund may be required to treat as
illiquid over-the-counter options purchased and securities being used to cover
certain written over-the-counter options.
Options on Securities. As discussed more generally above, the Fund may engage
in writing covered call options. The Fund may also purchase put options and
enter into closing transactions. The principal reason for writing covered call
options on securities is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forgoes the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums the Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by the Fund will normally have expiration dates between one and
six months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
when the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively.
The Fund may write (a) in-the-money call options when the Manager expects the
price of the underlying security to remain flat or decline moderately during the
option period, (b) at-the-money call options when the Manager expects the price
of the underlying security to remain flat or advance moderately during the
option period and (c) out-of-the-money call options when the Manager expects
that the price of the security may increase but not above a price equal to the
sum of the exercise price plus the premiums received from writing the call
option. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call
8
<PAGE>
options as to the relation of exercise price to market price) may be utilized in
the same market environments as such call options are used in equivalent
transactions.
So long as the obligation of the Fund as the writer of an option continues, the
Fund may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice. To secure its obligation to deliver the underlying security
when it writes a call option, or to pay for the underlying security when it
writes a put option, the Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation ("Clearing Corporation") or similar clearing corporation
and the securities exchange on which the option is written.
An option position may be closed out only where there exists a secondary market
for an option of the same series on a recognized securities exchange or in the
over-the-counter market. The Fund expects to write options only on national
securities exchanges or in the over-the-counter market. The Fund may purchase
put options issued by the Clearing Corporation or in the over-the-counter
market.
The Fund may realize a profit or loss upon entering into a closing transaction.
In cases in which the Fund has written an option, it will realize a profit if
the cost of the closing purchase transaction is less than the premium received
upon writing the original option and will incur a loss if the cost of the
closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages in
a closing sale transaction, whether it recognizes a profit or loss will depend
upon whether the amount received in the closing sale transaction is more or less
than the premium the Fund initially paid for the original option plus the
related transaction costs.
Although the Fund generally will purchase or write only those options for which
the Manager believes there is an active secondary market so as to facilitate
closing transactions, there is no assurance that sufficient trading interest to
create a liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the Clearing Corporation and
national securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
9
<PAGE>
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or written, or
exercised within certain periods, by an investor or group of investors acting in
concert (regardless of whether the options are written on the same or different
securities exchanges or are held, written or exercised in one or more accounts
or through one or more brokers). It is possible that the Fund and other clients
of the Manager and certain of their affiliates may be considered to be such a
group. A securities exchange may order the liquidation of positions found to be
in violation of these limits, and it may impose certain other sanctions.
In the case of options written by the Fund that are deemed covered by virtue of
the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stocks with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, the Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk because the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed stock, but the Fund may incur
additional transaction costs or interest expenses in connection with any such
purchase or borrowing.
Although the Manager will attempt to take appropriate measures to minimize the
risks relating to the Fund's writing of call options and purchasing of put and
call options, there can be no assurance that the Fund will succeed in its
option-writing program.
Stock Index Options. As described generally above, the Fund may purchase put
and call options and write call options on domestic stock indexes listed on
domestic exchanges in order to realize its investment objective of long-term
capital growth or for the purpose of hedging its portfolio. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Some stock index options are based on a broad market index such as the
New York Stock Exchange Composite Index or the Canadian Market Portfolio Index,
or a narrower market index such as the Standard & Poor's 100. Indexes also are
based on an industry or market segment such as the American Stock Exchange Oil
and Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock
10
<PAGE>
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price movements in the portion of
the securities portfolio of the Fund correlate with price movements of the stock
index selected. Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock, whether the
Fund will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indexes will be subject to the
Manager's ability to predict correctly movements in the direction of the stock
market generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Futures Contracts and Options on Futures Contracts. As described generally
above, the Fund may invest in stock index futures contracts and options on
futures contracts traded on a domestic exchange or board of trade. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security at a specified future time and at a
specified price. The primary purpose of entering into a futures contract by the
Fund is to protect the Fund from fluctuations in the value of securities without
actually buying or selling the securities. The Fund may enter into futures
contracts and options on futures to seek higher investment returns when a
futures contract is priced more attractively than stocks comprising a benchmark
index, to facilitate trading or to reduce transaction costs. The Fund will enter
into futures contracts and options only on futures contracts that are traded on
a domestic exchange and board of trade. Assets committed to futures contracts
will be segregated on the Fund's books to the extent required by law.
The purpose of entering into a futures contract by the Fund is to protect the
Fund from fluctuations in the value of securities without actually buying or
selling the securities. For example, in the case of stock index futures
contracts, if the Fund anticipates an increase in the price of stocks it intends
to purchase at a later time, the Fund could enter into contracts to purchase the
stock index (known as taking a "long" position) as a temporary substitute for
the purchase of stocks. If an increase in the market occurs that influences the
stock index as anticipated, the value of the futures contracts increases and
thereby serves as a hedge against the Fund's not participating in a market
advance. The Fund then may close out the futures contracts by entering into
offsetting futures contracts to sell the stock index (known as taking a "short"
position) as it purchases individual stocks. The Fund can accomplish similar
results by buying securities with long maturities and selling securities with
short maturities. But by using futures contracts as an investment tool to reduce
risk, given the greater liquidity in the futures market, it may be possible to
accomplish the same result more easily and more quickly.
No consideration will be paid or received by the Fund upon the purchase or sale
of a futures contract. Initially, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10% of
the contract amount (this amount is subject to change by the exchange or board
of trade on which the contract is traded and brokers or members
11
<PAGE>
of such board of trade may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund, upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the index or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." In addition, when
the Fund enters into a long position in a futures contract or an option on a
futures contract, it must deposit into a segregated account with the Fund's
custodian an amount of cash or cash equivalents equal to the total market value
of the underlying futures contract, less amounts held in the Fund's commodity
brokerage account at its broker. At any time prior to the expiration of a
futures contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
There are several risks in connection with the use of futures contracts as a
hedging device. Successful use of futures contracts by the Fund is subject to
the ability of the Manager to predict correctly movements in the stock market or
in the direction of interest rates. These predictions involve skills and
techniques that may be different from those involved in the management of
investments in securities. In addition, there can be no assurance that there
will be a perfect correlation between movements in the price of the securities
underlying the futures contract and movements in the price of the securities
that are the subject of the hedge. A decision of whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected trends
in market behavior or interest rates.
Positions in futures contracts may be closed out only on the exchange on which
they were entered into (or through a linked exchange) and no secondary market
exists for those contracts. In addition, although the Fund intends to enter into
futures contracts only if there is an active market for the contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, and in
the event of adverse price movements, the Fund would be required to make daily
cash payments of variation margin; in such circumstances, an increase in the
value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. As described above, however,
no assurance can be given that the price of the securities being hedged will
correlate with the price movements in a futures contract and thus provide an
offset to losses on the futures contract.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 7 below and the Fund's investment
objective have been adopted by the Company as fundamental policies of the Fund.
Under the 1940 Act, a fundamental policy may not be changed with respect to a
fund without the vote of a majority of
12
<PAGE>
the outstanding voting securities of the fund. Majority is defined in the 1940
Act as the lesser of (a) 67% or more of the shares present at a fund meeting, if
the holders of more than 50% of the outstanding shares of the fund are present
or represented by proxy, or (b) more than 50% of outstanding shares. The
remaining restrictions may be changed by a vote of a majority of the Company's
Board of Directors at any time.
Under the investment restrictions adopted by the Company with respect to the
Fund: the Fund will not
1. Invest more than 25% of its total assets in securities, the issuers of
which conduct their business activities in the same industry. For purposes of
this limitation, securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal governments and their
political subdivisions are not considered to be issued by members of any
industry.
2. Borrow money, except that (a) the Fund may borrow from banks for temporary
or emergency (not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of securities,
and (b) the Fund may, to the extent consistent with its investment policies,
enter into reverse repurchase agreements, forward roll transactions and similar
investment strategies and techniques. To the extent that it engages in
transactions described in (a) and (b), the Fund will be limited so that no more
than 33 1/3% of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing is made, is
derived from such transactions.
3. Issue "senior securities" as defined in the 1940 Act and the rules,
regulations and orders thereunder, except as permitted under the 1940 Act and
the rules, regulations and orders thereunder.
4. Make loans. This restriction does not apply to: (a) the purchase of debt
obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under the 1940 Act.
5. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts, but this restriction shall not prevent the Fund from (a)
investing in securities of issuers engaged in the real estate business or the
business of investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate business or the
business of investing in real estate) and securities which are secured by real
estate or interests therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies to the extent
consistent with the Fund's investment objective and policies); or (d) investing
in real estate investment trust securities.
6. Engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
13
<PAGE>
7. Purchase or otherwise acquire any illiquid security except as permitted
under the 1940 Act for open-end investment companies, which currently permits up
to 15% of the Fund's net assets to be invested in illiquid securities.
If any percentage restriction described above is complied with at the time of an
investment, a later increase or decrease in percentage resulting from a change
in values or assets will not constitute a violation of such restriction.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 Fund, as defined in
the 1940 Act, is indicated by an asterisk.
Paul R. Ades, Director (Age 59). 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 75). Private investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Dwight B. Crane, Director (Age 61). Professor, Graduate School of Business
Administration, Harvard University. His address is Graduate School of Business
Administration, Harvard University, Boston, Massachusetts 02163.
Frank G. Hubbard, Director (Age 62). Vice President, S&S Industries; Former
Corporate Vice President, Materials Management and Marketing Services of Huls
America, Inc. His address is 80 Centennial Avenue P.O. Box 456, Piscataway, New
Jersey 08855-0456.
*Heath B. McLendon, Chairman of the Board, President and Chief Executive Officer
(Age 65). Managing Director of Salomon Smith Barney Inc. ("Salomon Smith
Barney"); Director and President of SSBC Fund Management Inc. and Travelers
Investment Adviser, Inc. ("TIA"); and formerly Chairman of the Board of Smith
Barney Strategy Advisers Inc. Mr. McLendon is a director of 59 investment
companies associated with Salomon Smith Barney Holdings Inc. His address is 388
Greenwich Street, New York, New York 10013.
Jerome Miller, Director (Age 60). Retired, Former President, Asset Management
Group of Shearson Lehman Brothers. His address is 27 Hemlock Road, Manhasset,
New York, NY 11030.
Ken Miller, Director (Age 57). President of Young Stuff Apparel Group, Inc. His
address is 1411 Broadway, New York, New York 10018.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41). Managing
Director of Salomon Smith Barney, Chief Financial Officer of the Smith Barney
Mutual Funds; Director and Senior
14
<PAGE>
Vice President of SSBC and TIA. His address is 388 Greenwich Street, New York,
New York 10013.
Alan Blake, Vice President and Investment Officer (Age 48). Managing Director
of Salomon Smith Barney; Investment Officer of SSBC. His address is 388
Greenwich Street, New York, New York 10013.
Frances A. Root, Vice President and Investment Officer (Age 40). Managing
Director of Salomon Smith Barney; Investment Officer of SSBC. Her address is
388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 48). Managing Director of Salomon Smith
Barney; General Counsel and Secretary of SSBC and TIA. Her address is 388
Greenwich Street, New York, New York 10013.
No officer, director or employee of Salomon Smith Barney or any parent or
subsidiary receives any compensation from the Company for serving as an officer
or Director of the Company. The Company pays each Director who is not an
officer, director or employee of Salomon Smith Barney or any of its affiliates a
fee of $22,500 per annum plus $2,900 per meeting attended and reimburses travel
and out-of-pocket expenses. During the fiscal year ended December 31, 1998
such expenses totaled $9,443. For the fiscal year ended December 31, 1998, the
Directors of the Company were paid the following compensation:
<TABLE>
<CAPTION>
Total Pension or Number of Funds for
Retirement Benefits Compensation from Company Which Director
Aggregate Compensation Accrued as part of Fund and Fund Complex Paid to Serves Within Fund
Name of Person from Company Expenses Directors Complex
- -------------- ------------ -------- --------- -------
<S> <C> <C> <C> <C>
Paul R. Ades $29,700 $0 $ 54,225 5
Herbert Barg 29,700 0 105,425 16
Dwight B. Crane 29,300 0 139,975 22
Frank G. Hubbard 29,600 0 54,125 5
Heath B. McLendon 0 0 0 59
Jerome Miller 22,900 0 44,925 5
Ken Miller 29,500 0 53,625 5
</TABLE>
Upon attainment of age 80, Directors are required to change to emeritus status.
Directors Emeritus are entitled to serve in emeritus status for a maximum of 10
years during which time they are paid 50% of the annual retainer fee and meeting
fees otherwise applicable to the Fund Directors, together with reasonable out-
of-pocket expenses for each meeting attended.
- ------------------------
Investment Manager - SSBC
SSBC (formerly known as Mutual Management Corp) serves as investment manager to
the Fund pursuant to an investment management agreement (the "Investment
Management Agreement") with the Fund which was approved by the Board of
Directors, including a majority of directors who are not "interested persons" of
the Fund or the Manager. The Manager is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. ("Holdings"), which in turn, is a wholly owned
subsidiary of Citigroup Inc. Subject to the supervision and direction of the
Company's Board of Directors, the Manager manages the Fund's portfolio in
accordance with the Fund's stated
15
<PAGE>
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities, and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. The Manager pays the salary of any officer and employee who is employed by
both it and the Fund. The Manager bears all expenses in connection with the
performance of its services. The Manager also: (a) assists in supervising all
aspects of the Fund's operations except those it performs under its investment
advisory agreement; b) supplies the Fund with office facilities (which may be in
SSBC's own offices), statistical and research data, data processing services,
clerical, accounting and bookkeeping services, including, but not limited to,
the calculation of (i) the net asset value of shares of the Fund, (ii)
applicable contingent deferred sales charges and similar fees and charges and
(iii) distribution fees, internal auditing and legal services, internal
executive and administrative services, and stationary and office supplies; and
(c) prepares reports to shareholders of the Fund, tax returns and reports to and
filings with the SEC and state blue sky authorities.
As compensation for investment management services, the Fund pays the Manager a
fee computed daily and paid monthly at the annual rate of 0.75% of the Fund's
average daily net assets.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Company. The Directors who are
not "interested persons" of the Company have selected Stroock & Stroock & Lavan
LLP to serve as their legal counsel.
KPMG LLP, independent accountants, 345 Park Avenue, New York, New York 10154,
serve as auditors of the Fund and will render an opinion on the Fund's financial
statements annually beginning with the fiscal period ending April 30, 2000.
Custodian and Transfer Agent
PNC Bank, National Association ("PNC Bank"), located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103, serves as the custodian of the Fund.
Under its agreement with the Company on behalf of the Fund, PNC Bank holds the
Fund's portfolio securities and keeps all necessary accounts and records. For
its services, PNC Bank receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges. The assets of the Fund are held under bank custodianship in compliance
with the 1940 Act.
First Data Investor Services Group, Inc. ("First Data" or the "Transfer Agent"),
located at Exchange Place, Boston, Massachusetts 02109, serves as the Fund's
transfer agent. Under the transfer agency agreement, First Data maintains the
shareholder account records for the Fund, handles certain communications between
shareholders and the Fund and distributes dividends and distributions payable by
the Fund. For these services, First Data receives a monthly fee computed on the
basis of the number of shareholder accounts it maintains for the Fund during the
month and is reimbursed for out-of-pocket expenses.
16
<PAGE>
Distributor
CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts 02109-5408 serves
as the Fund's distributor pursuant to a written agreement with the Company dated
October 8, 1998 (the "Distribution Agreement") which was approved by the
Company's Board of Directors, including a majority of the independent directors,
on July 15, 1998.
When payment is made by the investor before the settlement date, unless
otherwise noted by the investor, the funds will be held as a free credit balance
in the investor's brokerage account and Salomon Smith Barney may benefit from
the temporary use of the funds. The Company's Board of Directors has been
advised of the benefits to Salomon Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when reviewing the
Investment Management and Distribution Agreements for continuance.
Distribution Arrangements
To compensate Salomon Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule l2b-1 under the
1940 Act. Under the Plan, the Fund pays Salomon Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.25% of the
value of the Fund's average daily net assets attributable to the Class A, Class
B and Class L shares. In addition, the Fund pays Salomon Smith Barney a
distribution fee with respect to the Class B and Class L shares primarily
intended to compensate Salomon Smith Barney for its initial expense of paying
Financial Consultants a commission upon sales of those shares. The Class B and
Class L distribution fee is calculated at the annual rate of 0.75% of the value
of the Fund's average daily net assets attributable to the shares of the
respective Class.
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 directors who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plan or in the
Distribution Agreement (the "independent directors"). The Plan may not be
amended to increase the amount of the service and distribution fees without
shareholder approval, and all amendments of the Plan also must be approved by
the directors including all of the independent directors in the manner described
above. The Plan may be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the independent directors or, with respect to
the Fund, by vote of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act). Pursuant to the Plan, Salomon Smith Barney will
provide the Board of Directors with periodic reports of amounts expended under
the Plan and the purpose for which such expenditures were made.
Portfolio Transactions
The Manager arranges for the purchase and sale of the Fund's securities and
selects brokers and dealers (including Salomon Smith Barney) which in its best
judgment provide prompt and reliable execution at favorable prices and
reasonable commission rates. The Manager may select brokers and dealers that
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
17
<PAGE>
the commissions as reasonable in relation to the value of the brokerage and/or
research services. In selecting a broker, including Salomon Smith Barney, for a
transaction, the primary consideration is prompt and effective execution of
orders at the most favorable prices. Subject to that primary consideration,
dealers may be selected for research statistical or other services to enable the
Manager to supplement its own research and analysis.
Decisions to buy and sell securities for the Fund are made by the Manager,
subject to the overall supervision and review of the Company's Board of
Directors. Portfolio securities transactions for the Fund are effected by or
under the supervision of the Manager.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter market, but the price of those securities
includes an undisclosed commission or mark-up. Over-the-counter purchases and
sales are transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere. The cost of
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers, it is the
Fund's policy to seek the best overall terms available. The Manager, in seeking
the most favorable price and execution, considers all factors it deems relevant,
including, for example, the price, the size of the transaction, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions. The Manager
receives research, statistical and quotation services from several broker-
dealers with which it places the Fund's portfolio transactions. It is possible
that certain of the services received primarily will benefit one or more other
accounts for which the Manager exercises investment discretion. Conversely, the
Fund may be the primary beneficiary of services received as a result of
portfolio transactions effected for other accounts. The Manager's fee under the
management agreement is not reduced by reason of its receiving such brokerage
and research services. The Company's Board of Directors, in its discretion, may
authorize the Manager to cause the Fund to pay a broker that provides brokerage
and research services to the Manager a commission in excess of that which
another qualified broker would have charged for effecting the same transaction.
Salomon Smith Barney will not participate in commissions from brokerage given by
the Fund to other brokers or dealers and will not receive any reciprocal
brokerage business resulting therefrom.
In accordance with Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, the
Company's Board of Directors has determined that any portfolio transaction for
the Fund may be executed through Salomon Smith Barney or an affiliate of Salomon
Smith Barney if, in the Manager's judgment, the use of Salomon Smith Barney or
an affiliate is likely to result in price and execution at least as favorable as
those of other qualified brokers and if, in the transaction, Salomon Smith
Barney or the affiliate charges the Fund a commission rate consistent with those
charged by Salomon Smith Barney or an affiliate to comparable unaffiliated
customers in similar transactions. In addition, under SEC rules, Salomon Smith
Barney may directly execute such transactions for the Fund on the floor of any
national securities exchange, provided: (a) the Board of Directors has
18
<PAGE>
expressly authorized Salomon Smith Barney to effect such transactions; and (b)
Salomon Smith Barney annually advises the Fund of the aggregate compensation it
earned on such transactions.
Even though investment decisions for the Fund are made independently from those
of the other accounts managed by the Manager, investments of the kind made by
the Fund also may be made by those other accounts. When the Fund and one or more
accounts managed by the Manager are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Manager to be equitable. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained for or disposed of by the Fund.
The Fund will not purchase securities during the existence of any underwriting
or selling group relating to the securities, of which the Manager is a member,
except to the extent permitted by the SEC. Under certain circumstances, the
Fund may be at a disadvantage because of this limitation in comparison with
other Funds that have similar investment objectives but that are not subject to
a similar limitation.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of purchases or sales of
portfolio securities during the year, excluding purchases or sales of short-term
securities, divided by the monthly average value of portfolio securities) is
generally not expected to exceed 100%. The rate of turnover will not be a
limiting factor, however, when the Fund deems it desirable to sell or purchase
securities. The Manager will rebalance the allocation of value and growth
securities in the Fund's portfolio at the end of each quarter and at any time in
which the percentage of the Fund's portfolio invested in either value or growth
securities equals or exceeds 55% of the Fund's total assets invested in both
value and growth securities for a period of more than 10 days. As a result, when
securities in either the value or growth style portion of the Fund's portfolio
have underperformed the securities in the portion of the portfolio devoted to
the other style, the Manager will rebalance the portfolio to increase the Fund's
assets allocated to the style that underperformed, and decrease the assets
allocated to the style that outperformed, the other style. The Manager will also
monitor the Fund's portfolio to ensure that no more than 25% of the Fund's
assets are concentrated in the securities of companies in the same industry and
that the Fund complies with its other investment policies. The Manager may cause
the Fund to sell or purchase securities to ensure compliance with the Fund's
investment policies.
PURCHASE OF SHARES
Limited Offering
Unlike most mutual funds which make their shares available for investment on a
continuous basis, shares of the Fund are expected to be offered to persons not
currently invested in the Fund only during the subscription offering period and
the quarterly open periods. Current shareholders in the Fund may buy additional
shares on any business day.
19
<PAGE>
Subscription Offering Period
Salomon Smith Barney and other broker-dealers in the selling group will solicit
subscriptions for shares of the Fund during the initial offering period, which
is scheduled to end on August 25, 1999. On the third business day after
termination of the initial offering period, subscriptions for the shares will be
payable, shares will be issued and the Fund will commence investment operations.
No additional shares of the Fund will be sold until the first quarterly open
period, expected to be in December 1999.
Quarterly Open Periods
Although subject to change at any time by the Manager, it is expected currently
that shares of the Fund will be offered to new shareholders only during the two
week period beginning on the first Monday of the third month of each calendar
quarter (March, June, September and December) and ending on Friday of the
following week.
Sales Charge Alternatives
The following classes of shares are available for purchase. See the prospectus
for a discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
Dealers'
Sales Charge as a % Sales Charge as a Reallowance as %
Amount of Investment of Transaction % of Amount Invested Of 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 deferred
sales charge of 1.00% on redemptions made within 12 months of purchase. The
deferred sales charge on Class A shares is payable to Salomon Smith Barney,
which compensates Salomon Smith Barney Financial Consultants and other
dealers whose clients make purchases of $500,000 or more. The deferred
sales charge is waived in the same circumstances in which the deferred
sales charge applicable to Class B and Class L shares is waived. See
"Deferred Sales Charge Provisions" and "Waivers of Deferred Sales Charge."
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 1933 Act. The
reduced sales charges shown above apply to the aggregate of purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
20
<PAGE>
Class B Shares. Class B shares are sold without an initial sales charge but are
subject to a deferred sales charge payable upon certain redemptions. See
"Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a deferred
sales charge payable upon certain redemptions. See "Deferred Sales Charge
Provisions" below. Until June 22, 2001, purchases of Class L shares by
investors who were holders of Class C shares of other Smith Barney Mutual Funds
on June 12, 1998 will not be subject to the 1.00% initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
deferred sales charge and are available only to investors investing a minimum of
$15,000,000 (except purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount).
General
The Fund's shares are not continuously offered to new investors. See "Purchase
of Shares - Limited Offering."
Investors may purchase shares from a Salomon Smith Barney Financial Consultant
or a broker that clears through Salomon Smith Barney ("Dealer Representative").
In addition, certain investors, including qualified retirement plans purchasing
through certain Dealer Representatives, may purchase shares directly from the
Fund. When purchasing shares of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class L or Class Y shares. Salomon Smith
Barney and Dealer Representatives may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at the Transfer Agent are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the Fund
by making an initial investment of at least $1,000 for each account, or $250 for
an IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(c) of the Code, the minimum initial investment required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes in
the Fund is $25. There are no minimum investment requirements for Class A
shares for employees of Citigroup and its subsidiaries, including Salomon Smith
Barney, unitholders who invest distributions from a Unit Investment Trust
("UIT") sponsored by Salomon Smith Barney, and Directors/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 a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the New York Stock Exchange
("NYSE"), on any day the Fund
21
<PAGE>
calculates its net asset value, are priced according to the net asset value
determined on that day (the "trade date"). Orders received by a Dealer
Representative prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the Fund or the Fund's
agent prior to its close of business. For shares purchased through Salomon Smith
Barney or a Dealer Representative purchasing through Salomon Smith Barney,
payment for shares of the Fund is due on the third business day after the trade
date. In all other cases, payment must be made with the purchase order.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A shares may be made at net
asset value without a sales charge in the following circumstances: (a) sales to
(i) Board Members and employees of Citigroup and its subsidiaries and any
Citigroup affiliated funds including the Smith Barney Mutual Funds (including
retired Board Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or employee); and to
a pension, profit-sharing or other benefit plan for such persons and (ii)
employees of members of the National Association of Securities Dealers, Inc.,
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
resold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company to effect the combination of such company with the
Fund by merger, acquisition of assets or otherwise; (c) purchases of Class A
shares by any client of a newly employed Salomon Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Salomon Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds of the redemption of shares
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have redeemed Class
A shares in the Fund (or Class A shares of another Smith Barney Mutual Fund that
is offered with a sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of Citigroup or its
subsidiaries (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by a separate account used to fund certain
unregistered variable annuity contracts; (h) investments of distributions from a
UIT sponsored by Salomon Smith Barney; (i) purchases by investors participating
in a Salomon Smith Barney fee-based arrangement; and (j) purchases of Class A
shares by Section 403(b) or Section 401(a) or (k) accounts associated with
Copeland Retirement Programs. In order to obtain such discounts, the purchaser
must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
Right of Accumulation. Class A shares of the Fund may be purchased by ''any
person'' (as defined above) at a reduced sales charge or at net asset value
determined by aggregating the dollar amount of the new purchase and the total
net asset value of all Class A shares of the Fund and of other Smith Barney
Mutual Funds that are offered with a sales charge as currently listed under
"Exchange Privilege" then held by such person and applying the sales charge
applicable to
22
<PAGE>
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.
Letter of Intent - Class A Shares. A Letter of Intent for an amount of $50,000
or more provides an opportunity for an investor to obtain a reduced sales charge
by aggregating investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the ''Amount of Investment'' as referred to in the preceding sales charge table
includes (i) all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the letter plus (ii) the
value of all Class A shares previously purchased and still owned. Each
investment made 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. The term of the Letter
will commence upon the date the Letter is signed, or at the options of the
investor, up to 90 days before such date. Please contact a Salomon Smith Barney
Financial Consultant or First Data to obtain a Letter of Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent may also be used as a way
for investors to meet the minimum investment requirement for Class Y shares
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). Such investors must make
an initial minimum purchase of $5,000,000 in Class Y shares of the Fund and
agree to purchase a total of $15,000,000 of Class Y shares of the Fund within 13
months from the date of the Letter. If a total investment of $15,000,000 is not
made within the 13-month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (including
a service fee of 0.25%) and expenses applicable to the Fund's Class A shares,
which may include a deferred sales charge of 1.00%. Please contact a Salomon
Smith Barney Financial Consultant or First Data for further information.
Deferred Sales Charge Provisions
"Deferred sales charge shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
are subject to a deferred sales charge. A deferred sales charge may be imposed
on certain redemptions of these shares.
Any applicable deferred sales charge 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. Deferred sales charge shares that are redeemed
will not be subject to a deferred sales charge to the extent that the value of
such shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; (c) with respect to
Class B shares, shares redeemed more than five years after their purchase; or
(d) with respect to Class L shares and Class A shares that are deferred sales
charge shares, shares redeemed more than 12 months after their purchase.
23
<PAGE>
Class L shares and Class A shares that are deferred sales charge shares are
subject to a 1.00% deferred sales charge if redeemed within 12 months of
purchase. In circumstances in which the deferred sales charge is imposed on
Class B shares, the amount of the charge will depend on the number of years
since the shareholder made the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number of years since a
purchase payment, all purchase payments made during a month will be aggregated
and deemed to have been made on the last day of the preceding Salomon Smith
Barney statement month. The following table sets forth the rates of the charge
for redemptions of Class B shares by shareholders.
Year Since Purchase Payment Was Made Deferred Sales Charge
- -------------------------------------------------------------------------
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- -------------------------------------------------------------------------
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholders as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder.
The length of time that deferred sales charge shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual Funds,
and fund shares being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gain distribution reinvestments in
such other funds. For Federal income tax purposes, the amount of the deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any deferred sales charge will
be paid to Salomon Smith Barney. To provide an example, assume an investor
purchased 100 Class B shares of the Fund at $10 per share for a cost of $1,000.
Subsequently, the investor acquired 5 additional shares of the Fund through
dividend reinvestment. During the fifteenth month after the purchase, the
investor decided to redeem $500 of his or her investment. Assuming at the time
of the redemption the net asset value had appreciated to $12 per share, the
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The deferred sales charge 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 Deferred Sales Charge
The deferred sales charge will be waived on: (a) exchanges (see ''Exchange
Privilege''); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) redemptions of shares made in connection with
qualified distributions from retirement plans or
24
<PAGE>
IRAs upon the attainment of age 59 1/2; (d) involuntary redemptions; and (e)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other 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 deferred sales charge imposed
on the prior redemption.
Deferred sales charge waivers will be granted subject to confirmation (by
Salomon Smith Barney in the case of shareholders who are also Salomon Smith
Barney clients or by First Data in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
Determination of Public Offering Price
The Fund offers its shares to current shareholders of the Fund on a continuous
basis. New investors may purchase the Fund's shares only during the quarterly
open periods. The public offering price for a Class A, Class B and Class Y
share of the 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 Class A share
purchases, including applicable rights of accumulation, equaling or exceeding
$500,000 is equal to the net asset value per share at the time of purchase and
no sales charge is imposed at the time of purchase. The public offering price
for a Class L share includes a 1.00% initial sales charge. A contingent
deferred sales charge ("CDSC") is imposed on certain redemptions of Class B
shares, and on Class L shares and Class A shares (purchased in amounts exceeding
$500,000) redeemed within one year of purchase.
REDEMPTION OF SHARES
The right of redemption of shares of the Fund may be suspended or the date of
payment postponed (a) for any periods during which the New York Stock Exchange,
Inc. (the "NYSE") is closed (other than for customary weekend and holiday
closings), (b) when trading in the markets the Fund normally utilizes is
restricted, or an emergency exists, as determined by the SEC, so that disposal
of the Fund's investments or determination of its net asset value is not
reasonably practicable or (c) for any other periods as the SEC by order may
permit for the protection of the Fund's shareholders.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period or the redemption proceeds are to be sent to an
address other than the address of record. Unless otherwise directed, redemption
proceeds will be mailed to an investor's address of record. First Data may
require additional supporting documents for redemptions made by corporations,
executors, administrators, trustees
25
<PAGE>
or guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
If a shareholder holds shares in more than one Class, any request for redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Transfer Agent receives further
instructions from Salomon Smith Barney, or if the shareholder's account is not
with Salomon Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act, in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith Barney brokerage account,
these funds will not be invested for the shareholder's benefit without specific
instruction and Salomon Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be detrimental to
the best interests of the remaining shareholders to make a redemption payment
wholly in cash, the Fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1.00% of the Fund's net assets
by a distribution in kind of portfolio securities in lieu of cash. Securities
issued as a distribution in kind may incur brokerage commissions when
shareholders subsequently sell those securities.
Additional Information Regarding Telephone Redemption And Exchange Program
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days prior notice to shareholders.
VALUATION OF SHARES
The net asset value per share of the Fund's Classes is calculated on each day,
Monday through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively. Because
of the differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ. The following is a description
of the procedures used by the Fund in valuing its assets.
26
<PAGE>
Securities listed on a national securities exchange will be valued on the basis
of the last sale on the date on which the valuation is made or, in the absence
of sales, at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued at the mean between the closing bid and asked prices
on each day, or, if market quotations for those securities are not readily
available, at fair value, as determined in good faith by the Company's Board of
Directors. Short-term obligations with maturities of 60 days or less are valued
at amortized cost, which constitutes fair value as determined by the Company's
Board of Directors. Amortized cost involves valuing an instrument at its
original cost to the Fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the instrument. All other securities and
other assets of the Fund will be valued at fair value as determined in good
faith by the Company's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below and in the Prospectus, shareholders of any of the Smith
Barney Mutual Funds may exchange all or part of their shares for shares of the
same class of other Smith Barney Mutual Funds, to the extent such shares are
offered for sale in the shareholder's state of residence, on the basis of
relative net asset value per share at the time of exchange as follows:
A. Class A and Class Y shares of the Fund may be exchanged without a
sales charge for the respective shares of any of the Smith Barney Mutual
Funds.
B. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another Smith
Barney Mutual Fund will be subject to the higher applicable CDSC of the
two funds and, for purposes of calculating CDSC rates and conversion
periods, will be deemed to have been held since the date the shares
being exchanged were deemed to be purchased.
C. Class L shares of any fund may be exchanged without a sales charge.
For purposes of CDSC applicability, Class L shares of the Fund exchanged
for Class L shares of another Smith Barney Mutual Fund will be deemed to
have been owned since the date the shares being exchanged were deemed to
be purchased.
The exchange privilege enables shareholders to acquire shares of the same Class
in a fund with different investment objectives when they believe that a shift
between funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should obtain and review
a copy of the current prospectus of each fund into which an exchange is being
considered. Prospectuses may be obtained from a Salomon Smith Barney Financial
Consultant. Investors who do not currently own shares of the Fund may exchange
into the Fund only during the quarterly open periods.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds are immediately invested, at a price as described above, in
shares of the fund being acquired. Salomon Smith
27
<PAGE>
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.
Additional Information Regarding the Exchange Privilege. Although the exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. The Manager may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may,
at its discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
PERFORMANCE DATA
From time to time, the Company may advertise the Fund's total return and average
annual total return in advertisements and/or other types of sales literature.
These figures are computed separately for Class A, Class B, Class L and Class Y
shares of the Fund. These figures are based on historical earnings and are not
intended to indicate future performance. Total return is computed for a
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 Company
may also include comparative performance information in advertising or marketing
the Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.
From time to time, the Company may quote the Fund's yield or total return in
advertisements or in reports and other communications to shareholders. The
Company may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications- Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New York
Times, USA Today and The Wall Street Journal. To the extent any advertisement or
sales literature of the Fund describes the expenses or performance of any Class
it will also disclose such information for the other Classes.
Average Annual Total Return
28
<PAGE>
"Average annual total return" figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P (1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return.
n = number of years.
ERV Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the end of
the measuring period. The Fund's net investment income changes in response to
fluctuations in interest rates and the expenses of the Fund.
Aggregate Total Return
The Fund's "aggregate total return," as described below, represents the
cumulative change in the value of an investment in the Fund for the specified
period and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 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.
The ERV assumes complete redemption of the hypothetical investment at the end of
the measuring period.
Performance will vary from time to time depending on market conditions, the
composition of the Fund's portfolio and operating expenses. Consequently, any
given performance quotation should not be considered representative of the
Fund's performance for any specified period in the future. Because performance
will vary, it may not provide a basis for comparing an investment in the Fund
with certain bank deposits or other investments that pay a fixed yield for a
stated period of time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
29
<PAGE>
Dividends and Distributions
The Fund's policy is to distribute its net investment income and net realized
capital gains, if any, annually. The Fund may also pay additional dividends
shortly before December 31 from certain amounts of undistributed ordinary and
capital gains realized, in order to avoid a Federal excise tax liability.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or deferred sales charge.
A shareholder may change the option at any time by notifying his Salomon Smith
Barney Financial Consultant or Dealer Representative. Shareholders whose
account is held directly at First Data should notify First Data in writing,
requesting a change to this reinvest option.
The per share dividends on Class B and Class L 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 L
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 L and Class Y shares.
Taxes
The following is a summary of the material United States federal income tax
considerations regarding the purchase, ownership and disposition of shares of
the Fund. Each prospective shareholder is urged to consult his own tax adviser
with respect to the specific federal, state, local and foreign tax consequences
of investing in a fund. The summary is based on the laws in effect on the date
of this SAI, which are subject to change.
The Fund and Its Investments
- ----------------------------
The Fund intends to qualify to be treated as a regulated investment company each
taxable year under the Code. To so qualify, the Fund must, among other things:
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of the Fund's taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the Fund's assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of the
value of its assets is invested in the securities (other than United States
government securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that the Fund controls and are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
30
<PAGE>
As a regulated investment company, the Fund will not be subject to United States
federal income tax on its net investment income (i.e., income other than its net
realized long- and short-term capital gains) and its net realized long- and
short-term capital gains, if any, that it distributes to its shareholders,
provided an amount equal to at least 90% of the sum of its investment company
taxable income (i.e., 90% of its taxable income minus the excess, if any, of its
net realized long-term capital gains over its net realized short-term capital
losses (including any capital loss carryovers), plus or minus certain other
adjustments as specified in the Code) and its net tax-exempt income for the
taxable year is distributed in compliance with the Code's timing and other
requirements but will be subject to tax at regular corporate rates on any
taxable income or gains it does not distribute. Furthermore, the Fund will be
subject to a United States corporate income tax with respect to such distributed
amounts in any year it fails to qualify as a regulated investment company or
fails to meet this distribution requirement. The Code imposes a 4% nondeductible
excise tax on the Fund to the extent it does not distribute by the end of any
calendar year at least 98% of its net investment income for that year and 98% of
the net amount of its capital gains (both long-and short-term) for the one-year
period ending, as a general rule, on October 31 of that year. For this purpose,
however, any income or gain retained by the Fund that is subject to corporate
income tax will be considered to have been distributed by year-end. In
addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any underdistribution or
overdistribution, as the case may be, from the previous year. The Fund
anticipates that it will pay such dividends and will make such distributions as
are necessary in order to avoid the application of this tax.
If, in any taxable year, the Fund fails to qualify as a regulated investment
company under the Code or fails to meet the distribution requirement, it would
be taxed in the same manner as an ordinary corporation and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income. In addition, in the event of a failure to qualify, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as ordinary
income, even though those distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term capital gains. If the Fund
fails to qualify as a regulated investment company in any year, it must pay out
its earnings and profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if the Fund failed to qualify as a
regulated investment company for a period greater than one taxable year, the
Fund may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
The Fund's transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code (including
provisions relating to "hedging transactions" and "straddles") that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out) and (b) may cause the Fund to recognize income without
receiving cash with which to pay
31
<PAGE>
dividends or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment in
order to mitigate the effect of these rules and prevent disqualification of the
Fund as a regulated investment company.
The Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by the Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
Foreign Investments. Dividends or other income (including, in some cases,
capital gains) received by the Fund from investments in foreign securities may
be subject to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes in some cases. The Fund will not be eligible to elect to
treat any foreign taxes paid by it as paid by its shareholders, who therefore
will not be entitled to credits for such taxes on their own tax returns.
Foreign taxes paid by the Fund will reduce the return from the Fund's
investments.
Passive Foreign Investment Companies. If the Fund purchases shares in certain
foreign investment entities, called "passive foreign investment companies" (a
"PFIC"), it may be subject to United States federal income tax on a portion of
any "excess distribution" or gain from the disposition of such shares even if
such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on
the Fund in respect of deferred taxes arising from such distributions or gains.
If the Fund were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing requirements,
the Fund might be required to include in income each year a portion of the
ordinary earnings and net capital gains of the qualified electing fund, even if
not distributed to the Fund, and such amounts would be subject to the 90% and
excise tax distribution requirements described above. In order to make this
election, the Fund would be required to obtain certain annual information from
the passive foreign investment companies in which it invests, which may be
difficult or not possible to obtain.
Recently, legislation was enacted that provides a mark-to-market election for
regulated investment companies effective for taxable years beginning after
December 31, 1997. This election would result in the Fund being treated as if
it had sold and repurchased all of the PFIC stock at the end of each year. In
this case, the Fund would report gains as ordinary income and would deduct
losses as ordinary losses to the extent of previously recognized gains. The
election,
32
<PAGE>
once made, would be effective for all subsequent taxable years of the
Fund, unless revoked with the consent of the IRS. By making the election, the
Fund could potentially ameliorate the adverse tax consequences with respect to
its ownership of shares in a PFIC, but in any particular year may be required to
recognize income in excess of the distributions it receives from PFICs and its
proceeds from dispositions of PFIC company stock. The Fund may have to
distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. The Fund will make
the appropriate tax elections, if possible, and take any additional steps that
are necessary to mitigate the effect of these rules.
Taxation of United States Shareholders
- --------------------------------------
Dividends and Distributions. Any dividend declared by the Fund in October,
November or December of any calendar year and payable to shareholders of record
on a specified date in such a month shall be deemed to have been received by
each shareholder on December 31 of such calendar year and to have been paid by
the Fund not later than such December 31, provided such dividend is actually
paid by the Fund during January of the following calendar year. The Fund
intends to distribute annually to its shareholders substantially all of its
investment company taxable income, and any net realized long-term capital gains
in excess of net realized short-term capital losses (including any capital loss
carryovers). The Fund currently expects to distribute any excess annually to
its shareholders. However, if the Fund retains for investment an amount equal
to all or a portion of its net long-term capital gains in excess of its net
short-term capital losses and capital loss carryovers, it will be subject to a
corporate tax (currently at a rate of 35%) on the amount retained. In that
event, the Fund will designate such retained amounts as undistributed capital
gains in a notice to its shareholders who (a) will be required to include in
income for United Stares federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, (b) will be
entitled to credit their proportionate shares of the 35% tax paid by the Fund on
the undistributed amount against their United States federal income tax
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject to federal income
tax on such capital gains will be entitled to a refund of their pro rata share
of such taxes paid by the Fund upon filing appropriate returns or claims for
refund with the Internal Revenue Service (the "IRS").
Dividends of net investment income and distributions of net realized short-term
capital gains are taxable to a United States shareholder as ordinary income,
whether paid in cash or in shares. Distributions of net-long-term capital
gains, if any, that the Fund designates as capital gains dividends are taxable
as long-term capital gains, whether paid in cash or in shares and regardless of
how long a shareholder has held shares of the Fund. Dividends and distributions
paid by the Fund attributable to dividends on stock of U.S. corporations
received by the Fund, with respect to which the Fund meets certain holding
period requirements, will be eligible for the deduction for dividends received
by corporations. Distributions in excess of the Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital to the extent of a shareholder's basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder holds his shares of
the Fund as capital assets). Shareholders receiving dividends or distributions
in the form of additional shares should be treated for United States federal
income
33
<PAGE>
tax purposes as receiving a distribution in the amount equal to the
amount of money that the shareholders receiving cash dividends or distributions
will receive, and should have a cost basis in the shares received equal to such
amount.
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares just purchased
at that time may reflect the amount of the forthcoming distribution, such
dividend or distribution may nevertheless be taxable to them. If the Fund is the
holder of record of any stock on the record date for any dividends payable with
respect to such stock, such dividends are included in the Fund's gross income
not as of the date received but as of the later of (a) the date such stock
became ex-dividend with respect to such dividends (i.e., the date on which a
buyer of the stock would not be entitled to receive the declared, but unpaid,
dividends) or (b) the date the Fund acquired such stock. Accordingly, in order
to satisfy its income distribution requirements, the Fund may be required to pay
dividends based on anticipated earnings, and shareholders may receive dividends
in an earlier year than would otherwise be the case.
Sales of Shares. Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in 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, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions
in the Fund, within a 61-day period beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss realized by
a shareholder on the sale of a Fund share held by the shareholder for six months
or less will be treated for United States federal income tax purposes as a long-
term capital loss to the extent of any distributions or deemed distributions of
long-term capital gains received by the shareholder with respect to such share.
If a shareholder incurs a sales charge in acquiring shares of the Fund, disposes
of those shares within 90 days and then acquires shares in a mutual fund for
which the otherwise applicable sales charge is reduced by reason of a
reinvestment right (e.g., an exchange privilege), the original sales charge will
not be taken into account in computing gain/loss on the original shares to the
extent the subsequent sales charge is reduced. Instead, the disregarded portion
of the original sales charge will be added to the 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 the second 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. The fund may be required to withhold, for United States
federal income tax purposes, 31% of the dividends, distributions and redemption
proceeds payable to shareholders who fail to provide the fund with their correct
taxpayer identification number or to make required certifications, or who have
been notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
34
<PAGE>
Notices. Shareholders will be notified annually by the Fund as to the United
States federal income tax status of the dividends, distributions and deemed
distributions attributable to undistributed capital gains (discussed above in
"Taxes - Taxation of United States Shareholders -Dividends and Distributions")
made by the Fund to its shareholders. Furthermore, shareholders will also
receive, if appropriate, various written notices after the close of the Fund's
taxable year regarding the United States federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
Other Taxation
- --------------
Distributions also may be subject to additional state, local and foreign taxes
depending on each shareholder's particular situation.
The foregoing is only a summary of certain material tax consequences affecting
the Fund and its shareholders. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
ADDITIONAL INFORMATION
The Company was incorporated on September 29, 1981 under the laws of the state
of Maryland 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.
The Company offers shares of eight separate series with a par value of $.001 per
share. The Fund offers shares currently classified into four Classes - A, B, L
and Y. Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges; if any, for each class; (c) the
distribution and/or service fees borne by each Class pursuant to the Plan; (d)
the expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Company's 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.
As permitted by Maryland law, there will normally be no meetings 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. At
that time, the directors then in office will call a shareholders' meeting for
the election of directors. The directors must call a meeting of shareholders
for the purpose of voting upon the question or removal of any director when
requested in writing to do so by the record holders of not less than 10% of the
outstanding shares of the Fund. At such a meeting, a director may be removed
after the holders of record of not less than a majority of the outstanding
shares of the Fund have declared that the director be removed
35
<PAGE>
either by declaration in writing or by votes cast in person or by proxy. Except
as set forth above, the directors shall continue to hold office and may appoint
successor directors.
As used in the Prospectus and this Statement of Additional Information, a "vote
of a majority of the outstanding voting securities" means the affirmative vote
of the lesser of (a) more than 50% of the outstanding shares of the Company (or
the affected series or Class) or (b) 67% or more of such shares present at a
meeting if more than 50% of the outstanding shares of the Company (or the
affected series or Class) are represented at the meeting in person or by proxy.
A series or Class shall be deemed to be affected by a matter unless it is clear
that the interests of each series or Class in the matter are identical or that
the matter does not affect any interest of the series or Class. The approval of
a management agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a "vote of a
majority of the outstanding voting securities" of the Fund; however, the
ratification of independent accountants, the election of directors, and the
approval of a distribution agreement that is submitted to shareholders are not
subject to the separate voting requirements and may be effectively acted upon by
a vote of the holders of a majority of all Company shares voting without regard
to series or Class.
Annual and Semi-annual Reports. The Fund sends its shareholders a semi-annual
report and an audited annual report, which include listings of investment
securities held by the Fund at the end of the period covered. In an effort to
reduce the Fund's printing and mailing costs, the Fund consolidates 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 Fund also
consolidates the mailing of its Prospectus so that a shareholder having multiple
accounts (that is, 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 Salomon
Smith Barney Financial Consultant or the Transfer Agent.
FINANCIAL STATEMENTS
As of the date of this SAI, the Fund had not yet commenced operations.
Consequently, there are no financial statements for the Fund at this time.
36
