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Smith Barney
EQUITY FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
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STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 7, 1994
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This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses, each dated November 7, 1994,
as amended or supplemented from time to time, of Smith Barney Equity Funds (the
"Trust") relating to Smith Barney Strategic Investors Fund and Smith Barney
Growth and Income Fund (each, a "Fund" and collectively, the "Funds"), each a
series of the Trust, and should be read in conjunction with the Prospectuses.
The Prospectuses may be obtained from a Smith Barney Financial Consultant or by
writing or calling the Trust at the address or telephone number set forth above.
This Statement of Additional Information, although not in itself a prospectus,
is incorporated by reference into the Prospectuses in its entirety.
<TABLE>
TABLE OF CONTENTS
For ease of reference, the same section headings are used in the Prospectuses
and in this Statement of Additional Information, except where shown below:
<S> <C>
Management of the Trust................................................................ 2
Investment Objectives and Management Policies.......................................... 6
Purchase of Shares..................................................................... 16
Redemption of Shares................................................................... 17
Distributor............................................................................ 18
Valuation of Shares.................................................................... 19
Exchange Privilege..................................................................... 20
Performance Data (See in each Prospectus "Performance")................................ 20
Taxes (See in each Prospectus "Dividends, Distributions and Taxes").................... 23
Additional Information................................................................. 27
Financial Statements................................................................... 27
Appendix............................................................................... 28
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<TABLE>
MANAGEMENT OF THE TRUST
The executive officers of the Trust are employees of certain of the
organizations that provide services to the Trust. These organizations are the
following:
<CAPTION>
NAME SERVICE
----------------------------------------- ----------------------------------------
<S> <C>
Smith Barney Inc.
("Smith Barney")....................... Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser (Growth and Income
("SBMFM").............................. Fund) and Administrator
Smith Barney Strategy Advisers Inc. Investment Adviser (Strategic Investors
("Strategy Advisers").................. Fund)
The Boston Company Advisors, Inc. Sub-Investment Adviser (Strategic
("Boston Advisors").................... Investors Fund) and Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe")........................ Custodian
The Shareholder Services Group, Inc.
("TSSG), a subsidiary of First Data
Corporation............................ Transfer Agent
</TABLE>
These organizations and the services they perform for the Trust and the
Funds are discussed in the Prospectuses and in this Statement of Additional
Information.
The names of the Trustees and the executive officers of the Trust, together
with information as to their principal business occupations, are set forth
below. Each Trustee who is an "interested person" of the Trust, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"), is indicated by
an asterisk.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
Lee Abraham, Trustee. Chairman and Chief Executive Officer of Associated
Merchandising Corporation, a major retail merchandising and sourcing
organization. His address is 1440 Broadway, Suite 1001, New York, New York
10018.
Antoinette C. Bentley, Trustee. Retired; formerly Senior Vice President and
Associate General Counsel of Crum and Foster, Inc., an insurance holding
company. Her address is 24 Fowler Road, Far Hills, New Jersey 07931.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board of and Consultant to The May Department Stores Company; Director of
Crystal Brands, Inc., Melville Corp. and R.G. Barry Corp. His address is
Anderson Road, Sherman, Connecticut 06784.
Richard E. Hanson, Jr., Trustee. Headmaster, The Peck School, Morristown,
NJ; prior to July 1, 1994 Headmaster, Lawrence Country Day School--Woodmere
Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of Woodmere
Academy. His address is 247 South Street, Morristown, NJ 07960.
Heath B. McLendon, Chairman of the Board and Investment Officer. Executive
Vice President of Smith Barney and Chairman of Strategy Advisers; prior to July
1993, Senior Executive Vice President of Shearson Lehman Brothers Inc.
("Shearson Lehman Brothers"); Vice Chairman of Shearson Asset Management, a
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member of the Asset Management Group of Shearson Lehman Brothers; a Director of
PanAgora Asset Management, Inc. and PanAgora Asset Management Limited. His
address is 388 Greenwich Street, New York, New York 10013.
Madelon DeVoe Talley, Trustee. Author; Governor at Large of the National
Association of Securities Dealers, Inc.; prior to 1985, Chairman of Rothschild
Asset Management Inc., a money management firm. Her address is 876 Park Avenue,
New York, New York 10021.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and
SBMFM; and Trustee of Corporate Realty
Income Trust I. His address is 388 Greenwich Street, New York, New York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of Strategic Advisers; prior to July 1993, Senior Vice
President of Shearson Lehman Brothers Inc., President of Shearson Lehman
Investment Strategy Advisors Inc. His address is 388 Greenwich Street, New York,
New York 10013.
R. Jay Gerken, Vice President and Investment Officer. Managing Director of
SBMFM; prior to July 1993 Managing Director of Shearson Lehman Advisors. His
address is 388 Greenwich Street, New York, New York 10013.
George V. Novello, Investment Officer. Managing Director of SBMFM; prior to
July 1993, Managing Director of Shearson Lehman Advisors. His address is 388
Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New York,
New York 10013.
William W. Carter, Jr., Investment Administrator. Vice President of Boston
Advisors; Executive Vice President of III; President of The Boston Company of
Southern California. His address is 300 S. Grand, Suite 1200, Los Angeles,
California 90071.
Stephen Thalasinos, Investment Administrator. Vice President of Boston
Advisors; Vice President of The Boston Company of Southern California; Vice
President of The Boston Company Asset Management, Inc. His address is 300 S.
Grand, Los Angeles, California 90071.
Each Trustee also serves as a trustee, director and/or general
partner of
certain other mutual funds for which Smith Barney serves as distributor.
As of October 31, 1994, the Trust's Trustees and officers of the Funds as a
group owned less than 1.00% of the outstanding shares of the Trust.
No officer, director or employee of Smith Barney, or of any parent or
subsidiary affiliate of Smith Barney will receives any compensation
from the Trust for serving as an officer or Trustee of the Trust. The Trust
pays each Trustee who is not an officer, director or employee of
Smith Barney or any of its affiliates a fee of
$6,000 per annum plus $1,500 per meeting attended and reimburses them for travel
and out-of-pocket expenses. For the fiscal year ended January 31, 1994, such
fees and expenses totalled $62,177.
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INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER, ADMINISTRATOR AND SUB-ADMINISTRATOR
SBMFM serves as investment adviser to Growth and Income Fund pursuant to a
transfer of the investment advisory agreement effective
November 7, 1994, from
its affiliate, Mutual Management Corp. Mutual Management Corp. and SBMFM
are both wholly owned subsidiaries of Smith Barney Holdings Inc. ("Holdings"),
which in turn is a wholly owned subsidiary of The Travelers Inc. ("Travelers").
The Advisory Agreement is dated July 30, 1993 (the "Advisory Agreement"),
and was first approved by the Trust's Board of Trustees, including a majority
of the Trustees who are not
"interested persons" of the Trust or SBMFM ("Independent Trustees") on April 6,
1993. The services provided by SBMFM under the Advisory Agreement are described
in the Prospectus under "Management of the Trust and the Fund." SBMFM bears all
expenses in connection with the performance of its services and pays the salary
of any officer and employee who is employed by both it and the Trust.
As compensation for investment advisory services rendered to
Growth and Income Fund,
the Fund pays a fee computed daily and paid monthly at the annual rate of 0.45%
of the value of the average daily net assets of the Fund.
SBMFM also serves as administrator to the Funds pursuant to a written
agreement (the "Administration Agreement") dated May 4, 1994, which was most
recently approved by the Trust's Board of Trustees, including a majority of
Trustees who are Independent Trustees, on August 10, 1994.
Boston Advisors serves as sub-administrator to the Funds
pursuant to
a written agreement (the "Sub-Administration Agreement") dated April 20, 1994,
which was most recently approved by the Trust's Board of Trustees, including a
majority of Trustees who are not "interested persons" of the Fund or Boston
Advisors on April 20, 1994.
Under the Sub-Administration Agreement, Boston
Advisors is paid a portion of the administration fee paid by the Fund to SBMFM
at a rate agreed upon from time to time between Boston Advisors and SBMFM.
Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc., a financial services holding company, which is in turn a wholly
owned subsidiary of Mellon Bank Corporation ("Mellon").
Certain of the services provided to the Funds by SBMFM and Boston Advisors
are described in the Prospectuses under "Management of the Trust and the Fund."
In addition to those services, SBMFM and Boston Advisors pay the salaries of all
officers and employees who are employed by both SBMFM and Boston Advisors and
the Fund, maintain office facilities for each Fund, furnish each Fund with
statistical and research data, clerical help and accounting, data processing,
bookkeeping, internal auditing and legal services and certain other services
required by the Funds, prepare reports to the Funds' shareholders and prepare
tax returns, reports to and filings with the Securities and Exchange Commission
(the "SEC") and state Blue Sky authorities. SBMFM and Boston Advisors bear all
expenses in connection with the performance of their services.
Strategy Advisers serves as investment adviser to Strategic Investors Fund
pursuant to a written agreement (the "Strategy Advisory Agreement"), which was
approved most recently by the Trust's Board of Trustees, including a majority of
the Independent Trustees, on August 10, 1994. Strategy Advisers is a wholly
owned subsidiary of Holdings. Certain of the services provided by Strategy
Advisers under the Strategy Advisory Agreement are described in the Prospectus
under "Management of the Trust and the Fund."
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As compensation for Strategy Advisers' services rendered to Strategic
Investors Fund, the Fund pays a fee computed daily and paid monthly at the
annual rate of .55% of the value of the Fund's average daily net assets.
Boston Advisors serves as sub-investment adviser to Strategic Investors
Fund pursuant to a written agreement (the "TBCA Sub-Advisory Agreement"), which
was most recently approved by the Trust's Board of Trustees, including a
majority of the Independent Trustees, on August 10, 1994. Boston Advisors is an
indirect wholly owned subsidiary of Mellon.
As compensation for Boston Advisors services rendered to Strategic
Investors Fund, the Fund pays a fee computed daily and paid monthly at the
annual rate of 0.275% of the value of the Fund's average daily net assets.
Each of SBMFM, Strategy Advisers, and Boston Advisors (each, an "Adviser"
and collectively, the "Advisers") pays the salaries of all officers and
employees who are employed by both it and the Trust, and maintains office
facilities for the Funds. Each of the service providers also bears all expenses
in connection with the performance of its services under its agreement relating
to a Fund.
For the fiscal years ended January 31, 1994, 1993 and 1992, the Funds paid
investment advisory and sub-investment advisory and/or administration fees to
their respective Advisers, sub-investment advisers and administrator as follows:
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
FISCAL YEAR ENDED
JANUARY 31,
----------------------
1994 1993
-------- --------
<S> <C> <C>
Investment Advisory fees...................................................... $264,363 $ 25,070
Administration fees........................................................... 117,495 11,142
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC INVESTORS FUND
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Investment Advisory fees......................................... $1,702,756 $1,466,635 $1,180,350
Administration fees.............................................. 609,031 532,668 429,218
</TABLE>
Each Adviser, sub-investment adviser, administrator and sub-administrator
has agreed that
if in any fiscal year the aggregate expenses of the Fund it serves (including
fees payable pursuant to its agreement with respect to the Fund, but excluding
interest, taxes, brokerage, fees paid pursuant to the Trust's services and
distribution plan, and, if permitted by the relevant state securities
commissions, extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, the Adviser and administrator, to the extent
required by state law, will reduce their fees to the Fund by the amount of such
excess expense, such amount to be allocated between or among them in the same
proportion as their respective fees bear to the combined fees for investment
advice and administration. Such fee reduction, if any, will be estimated and
reconciled on a monthly basis. The most restrictive state expense limitation
currently applicable to any Fund requires a reduction of fees in any year that
such expenses exceed 2.50% of the Fund's first $30 million of average net
assets, 2.00% of the next $70 million of average net assets and 1.50% of the
remaining average net assets.
Smith Barney serves as asset allocation consultant to Strategic Investors
Fund pursuant to a written agreement with the Trust, under which Smith Barney
provides the Fund with its conclusions concerning the
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portion of a model portfolio's assets that should be invested in equity,
fixed-income and money market instruments and gold securities in light of
current economic and market conditions. Strategic Investors Fund does not pay
any fee to Smith Barney for performing this service, and Smith Barney bears all
expenses in connection with providing this service.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as counsel to the Trust. Stroock & Stroock &
Lavan serves as counsel to the Trust's Independent Trustees.
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue
New York, New York 10154, serve as auditors of the Trust and will render an
opinion on each Fund's financial statements annually. Prior to October 19,
1994, Coopers & Lybrand L.L.P., independent accountants, served as
auditors of the Trust and rendered an opinion on each Fund's financial
statements for the fiscal year ended January 31, 1994.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the Funds and the policies
employed to achieve those objectives. This section contains supplemental
information concerning the types of securities and other instruments in which
the Funds may invest, the investment policies and portfolio strategies the Funds
may utilize and certain risks attendant to such investments, policies and
strategies. There can be no assurance that the respective investment objectives
of the Funds will be achieved.
United States Government Securities. United States government securities
include debt obligations of varying maturities issued or guaranteed by the
United States government or its agencies or instrumentalities ("U.S. government
securities"). Direct obligations of the United States Treasury include a variety
of securities that differ in their interest rates, maturities and dates of
issuance.
U.S. government securities include not only direct obligations of the
United States Treasury, but also include securities issued or guaranteed by the
Federal Housing Administration, Federal Financing Bank, Export-Import Bank of
the United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association, Maritime
Administration, Resolution Trust Corporation, Tennessee Valley Authority,
District of Columbia Armory Board, Student Loan Marketing Association and
various institutions that previously were or currently are part of the Farm
Credit System (which has been undergoing a reorganization since 1987). Because
the United States government is not obligated by law to provide support to an
instrumentality that it sponsors, a Fund will invest in obligations issued by
such an instrumentality only if the Fund's Adviser determines that the credit
risk with respect to the instrumentality does not make its securities unsuitable
for investment by the Fund.
Venture Capital Investments (Strategic Investors Fund). Strategic
Investors Fund may invest up to 5% of its total assets in venture capital
investments, that is, new and early stage companies whose securities are not
publicly traded. Venture capital investments may present significant
opportunities for capital appreciation but involve a high degree of business and
financial risk that can result in substantial losses. The disposition of U.S.
venture capital investments, which may include limited partnership interests,
normally would be restricted under Federal securities laws. Generally,
restricted securities may be sold only in privately negotiated transactions or
in public offerings registered under the Securities Act of 1933, as amended. The
Fund also may be subject to restrictions contained in the securities laws of
other countries in disposing of portfolio securities. As a result of these
restrictions, the Fund may be unable to dispose of such investments at times
when disposal is deemed appropriate due to investment or liquidity
considerations;
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alternatively, the Fund may be forced to dispose of such investments at less
than fair market value. Where registration is required, the Fund may be
obligated to pay part or all of the expenses of such registration.
Lending of Portfolio Securities. Each Fund has the ability to lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made, may not exceed 20% of a Fund's total assets taken
at value. A Fund will not lend portfolio securities to Smith Barney unless it
has applied for and received specific authority to do so from the SEC. Loans of
portfolio securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in a segregated account
in an amount equal to 100% of the current market value of the loaned securities.
From time to time, a Fund may pay 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, a Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either investing the
cash collateral in short-term instruments or obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as
collateral. A Fund will comply with the following conditions whenever its
portfolio securities are loaned: (a) the Fund must receive at least 100% cash
collateral or equivalent securities from the borrower; (b) the borrower must
increase such collateral whenever the market value of the securities loaned
rises above the level of such collateral; (c) the Fund must be able to terminate
the loan at any time; (d) the Fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distribution on the loaned
securities, and any increase in market value; (e) the Fund may pay only
reasonable custodian fees in connection with the loan; and (f) voting rights on
the loaned securities may pass to the borrower, provided, however, that if a
material event adversely affecting the investment in the loaned securities
occurs, the Trust's Board of Trustees must terminate the loan and regain the
right to vote the securities. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of a possible delay in receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans will be
made to firms deemed by each Fund's Adviser to be of good standing and will not
be made unless, in its judgment, the consideration to be earned from such loans
would justify the risk.
Options on Securities. The Funds may write covered call options and enter
into closing transactions with respect thereto.
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, the writer of a
covered call option forfeits the right to any appreciation in the value of the
underlying security above the strike price for the life of the option (or until
a closing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security. The size
of the premiums a 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 Funds normally will have expiration dates between
one and nine months from the date they are written. The exercise price of the
options may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of-the-money"), the market values of the underlying securities at the
times the options are written. A Fund may write (a) in-the-money call options
when its Adviser expects that the price of the underlying security will remain
flat or decline moderately during the option period, (b) at-the-money call
options when its Adviser expects that the price of the underlying security will
remain flat or
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advance moderately during the option period and (c) out-of-the-money call
options when its Adviser expects that the price of the underlying 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.
So long as the obligation of a 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 the Fund to deliver the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. A 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, a Fund will be required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (the "Clearing Corporation") and of
the domestic 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 securities exchange or in the
over-the-counter market. Strategic Investors Fund expects to write options only
on domestic securities exchanges.
A Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which a Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option.
Although Strategic Investors Fund generally will write only those options
for which the Fund's Adviser 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 the domestic 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 otherwise may
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, a Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class that may be held or written, or exercised
within certain time periods, by an investor or group of investors acting in
concert (regardless of whether the options are written on the same or different
national securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the Funds and
other clients of their respective Advisers 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.
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In the case of options written by a 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, a 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 securities an
equal number of shares to replace the borrowed stock, but the Fund may incur
additional transaction costs or interest expense in connection with any such
purchase or borrowing.
Money Market Instruments. Subject to the restrictions noted in the
Prospectuses, the money market instruments in which the Funds may invest are:
U.S. government securities; certificates of deposit ("CDs"), time deposits
("TDs") and bankers' acceptances issued by domestic banks (including their
branches located outside the United States and subsidiaries located in Canada),
domestic branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. The following is a more detailed
description of such money market instruments.
Bank Obligations. CDs are short-term, negotiable obligations of commercial
banks; TDs are non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates; and bankers' acceptances are
time drafts drawn on commercial banks by borrowers usually in connection with
international transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are insured
by the FDIC (although such insurance may not be of material benefit to a Fund,
depending upon the principal amount of CDs of each bank held by the Fund) and
are subject to federal examination and to a substantial body of Federal law and
regulation. As a result of governmental regulations, domestic branches of
domestic banks, among other things, generally are required to maintain specified
levels of reserves, and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may
be general obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and governmental
regulations. Such obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. Foreign branches of domestic banks are not necessarily subject to the
same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank than about a
domestic bank. CDs issued by wholly owned Canadian subsidiaries of domestic
banks are guaranteed as to repayment of principal and interest (but not as to
sovereign risk) by the domestic parent bank.
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Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may or may not be subject to reserve requirements imposed
by the Federal Reserve System or by the state in which the branch is located if
the branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (a) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) maintain assets within the
state in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of State Branches may not necessarily be
insured by the FDIC. In addition, there may be less publicly available
information about a domestic branch of a foreign bank than about a domestic
bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches of
foreign banks, each Fund's Adviser will carefully evaluate such investments on a
case-by-case basis.
Savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised by the Office of Thrift Supervision and are insured by the
Savings Association and Insurance Fund. As a result, such savings and loan
associations are subject to regulation and examination.
Commercial Paper. Commercial paper is a short-term, unsecured negotiable
promissory note of a domestic or foreign company. A Fund may invest in
short-term debt obligations of issuers that at the time of purchase are rated
A-2, A-1 or A-1+ by Standard & Poor's Corporation ("S&P") or Prime-2 or Prime-1
by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are issued by
companies having an outstanding unsecured debt issue currently rated within the
two highest ratings of S&P or Moody's. A discussion of S&P and Moody's rating
categories appears in the Appendix to this Statement of Additional Information.
A Fund also may invest in variable rate master demand notes, which typically are
issued by large corporate borrowers providing for variable amounts of principal
indebtedness and periodic adjustments in the interest rate according to the
terms of the instrument. Demand notes are direct lending arrangements between
the Fund and an issuer, and are not normally traded in a secondary market. A
Fund, however, may demand payment of principal and accrued interest at any time.
In addition, while demand notes generally are not rated, their issuers must
satisfy the same criteria as those set forth above for issuers of commercial
paper. Each Fund's Adviser will consider the earning power, cash flow and other
liquidity ratios of issuers of demand notes and continually will monitor their
financial ability to meet payment on demand.
Convertible Securities. The Funds may invest in convertible securities.
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar to both fixed-income
and equity securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and, therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly
10
<PAGE> 11
on a yield basis, and thus may not experience market value declines to the same
extent as the underlying common stock. When the market price of the underlying
common stock increases, the prices of the convertible securities tend to rise as
a reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Preferred Stock. The Funds may invest in preferred stocks. Preferred
stocks, like debt obligations, are generally fixed-income securities.
Shareholders of preferred stocks normally have the right to receive dividends at
a fixed rate when and as declared by the issuer's board of directors, but do not
participate in other amounts available for distribution by the issuing
corporation. Dividends on the preferred stock may be cumulative, and all
cumulative dividends usually must be paid prior to common stockholders receiving
any dividends. Preferred stock dividends must be paid before common stock
dividends and for that reason preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and therefore do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. In addition, preferred stocks are subordinated in right of payment
to all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
American, European and Continental Depositary Receipts. The assets of
Strategic Investors Fund may be invested in the securities of foreign issuers in
the form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are U.S.
dollar-denominated receipts typically issued by a domestic bank or trust company
that evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe typically by non-U.S. banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and CDRs in bearer form are designed for use in
European securities markets.
11
<PAGE> 12
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 8 below have been adopted by the Trust
with respect to each Fund as fundamental policies. Under the 1940 Act, a
fundamental policy of a Fund may not be changed without the vote of a majority
of the outstanding voting securities of the Fund, as defined in the 1940 Act.
Such majority is defined as the lesser of (a) 67% or more of the shares present
at the 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 the
outstanding shares. Investment restrictions 9 through 18 may be changed by vote
of a majority of the Trust's Board of Trustees at any time.
The investment policies adopted by the Trust prohibit a Fund from:
1. Purchasing the securities of any issuer (other than U.S.
government securities) if as a result more than 5% of the value of the
Fund's total assets would be invested in the securities of the issuer,
except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one
issuer, or more than 10% of the securities of any class of any one issuer;
provided that this limitation shall not apply to investments in U.S.
government securities.
3. Borrowing money, except that a Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount not to exceed 10% of the value of the Fund's
total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
is made. Whenever borrowings exceed 5% of the value of the total assets of
a Fund, the Fund will not make any additional investments.
4. Underwriting the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
5. Purchasing or selling real estate or interests in real estate,
except that the Fund may purchase and sell securities that are secured by
real estate and may purchase securities issued by companies that invest or
deal in real estate.
6. Investing in commodities, except that upon 60 days' notice given
to its shareholders, Strategic Investors Fund may engage in hedging
transactions involving futures contracts and related options, including
foreign and domestic stock index futures contracts and financial futures
contracts.
7. Making loans to others, except through the purchase of qualified
debt obligations, loans of portfolio securities and the entry into
repurchase agreements.
8. Purchasing any securities (other than U.S. government securities)
which would cause more than 25% of the value of the Fund's total assets at
the time of purchase to be invested in the securities of issuers conducting
their principal business activities in the same industry.
9. Purchasing securities on margin. For purposes of this restriction,
the deposit or payment of initial or variation margin in connection with
futures contracts or related options will not be deemed to
12
<PAGE> 13
be a purchase of securities on margin by any Fund permitted to engage in
transactions in futures contracts or related options.
10. Making short sales of securities or maintaining a short position.
11. Pledging, hypothecating, mortgaging or otherwise encumbering more
than 10% of the value of the Fund's total assets. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the
writing of covered call options and (b) collateral arrangements with
respect to (i) the purchase and sale of options on stock indexes and (ii)
initial or variation margin for futures contracts, will not be deemed to be
pledges of a Fund's assets.
12. Investing in oil, gas or other mineral exploration or development
programs, except that the Fund may invest in the securities of companies
that invest in or sponsor those programs.
13. Investing in securities of other investment companies registered
or required to be registered under the 1940 Act, except as they may be
acquired as part of a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange.
14. Writing or selling puts, calls, straddles, spreads or
combinations thereof, except that (a) Strategic Investors Fund may write
covered call options.
15. Purchasing restricted securities, illiquid securities (such as
repurchase agreements with maturities in excess of seven days) or other
securities that are not readily marketable if more than 10% of the total
assets of the Fund would be invested in such securities.
16. Purchasing any security if as a result the Fund would then have
more than 10% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer
than three years.
17. Making investments for the purpose of exercising control or
management.
18. Purchasing or retaining securities of any company if, to the
knowledge of the Trust, any of a Fund's officers or Trustees of the Trust
or any officer or director of an Adviser individually owns more than 1/2 of
1% of the outstanding securities of such company and together they own
beneficially more than 5% of such securities.
The Trust may make commitments more restrictive than the restrictions
listed above with respect to a Fund so as to permit the sale of shares of the
Fund in certain states. Should the Trust determine that any such commitment is
no longer in the best interests of a Fund and its shareholders, the Trust will
revoke the commitment by terminating the sale of shares of the Fund in the
relevant state. The percentage limitations contained in the restrictions listed
above apply at the time of purchases of securities.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading.
Nevertheless, the Funds will not consider turnover rate a limiting factor in
making investment decisions.
Under certain market conditions, a Fund may experience increased portfolio
turnover as a result of its options activities. For instance, the exercise of a
substantial number of options written by a Fund (due to appreciation of the
underlying security in the case of call options or depreciation of the
underlying security in the case of put options) could result in a turnover rate
in excess of 100%. In addition, Strategic Investors Fund may experience
increased portfolio turnover as a result of the asset allocation strategy that
it employs.
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<PAGE> 14
The portfolio turnover rate of a Fund is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of portfolio securities. Securities with remaining maturities of one year
or less on the date of acquisition are excluded from the calculation.
<TABLE>
For the fiscal years ended January 31, 1994 and 1993, the portfolio
turnover rates of the Funds were as follows:
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Strategic Investors Fund 131% 93%
Growth and Income Fund 79% 1%
</TABLE>
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether transacted on
a securities exchange or over the counter, will be effected in the primary
trading market for the securities. The primary trading market for a given
security generally is located in the country in which the issuer has its
principal office. Decisions to buy and sell securities for a Fund are made by
its Adviser or sub-investment adviser, which also is responsible for placing
these transactions, subject to the overall review of the Trust's Trustees.
Although investment decisions for each Fund are made independently from those of
the other accounts managed by its Adviser, investments of the type the Fund may
make also may be made by those other accounts. When a Fund and one or more other
accounts managed by its Adviser are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or disposed of by the Fund.
Transactions on domestic stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. There is
generally no stated commission in the case of securities traded in domestic or
foreign over-the-counter markets, but the prices of those securities include
undisclosed commissions or mark-ups. 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. U.S. government securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. government
securities may be purchased directly from the United States Treasury or from the
issuing agency or instrumentality, respectively.
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<PAGE> 15
<TABLE>
The following table sets forth certain information regarding each Fund's
payment of brokerage commissions:
<CAPTION>
FISCAL YEAR STRATEGIC
ENDED INVESTORS GROWTH AND
JANUARY 31 FUND INCOME FUND
------------ --------- -----------
<S> <C> <C> <C>
Total Brokerage Commissions 1992 $217,936 *
1993 258,626 30,915
1994 467,989 143,865
Commissions paid to 1992 62,521 *
Smith Barney or 1993 57,354 2,733
Shearson Lehman Brothers 1994 106,879 19,650
% of Total Brokerage
Commissions paid to
Smith Barney 1994 22.84% 13.66%
% of Total Transactions
involving Commissions paid
to Smith Barney 1994 25.99% 12.35%
<FN>
- ---------------
* The Fund commenced operations on November 6, 1992.
</TABLE>
The total brokerage commissions paid by the Funds for each fiscal year vary
primarily due to increases or decreases in the Funds' volume of securities
transactions on which brokerage commissions are charged.
In selecting brokers or dealers to execute portfolio transactions on behalf
of a Fund, the Fund's Adviser or sub-investment adviser seeks the best overall
terms available. In assessing the best overall terms available for any
transaction, each Adviser or sub-investment adviser will consider the factors
the Adviser or sub-investment adviser deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and the execution capability of the broker or dealer and the reasonableness of
the commission, if any, for the specific transaction and on a continuing basis.
In addition, each advisory agreement between the Trust and an Adviser relating
to a Fund authorizes the Adviser, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund, the
other Funds and/or other accounts over which the Adviser or its affiliates
exercise investment discretion. The fees under the advisory agreements and the
sub-investment advisory agreements relating to the Funds between the Trust and
the Advisers and the sub-investment advisers, respectively, are not reduced by
reason of their receiving such brokerage and research services. The Trust's
Board of Trustees periodically will review the commissions paid by the Funds to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Funds.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC thereunder, the Board of Trustees has
determined that transactions for a Fund may be
15
<PAGE> 16
executed through Smith Barney and other affiliated broker-dealers if, in the
judgment of the Fund's Adviser, the use of such broker-dealer is likely to
result in price and execution at least as favorable as those of other qualified
broker-dealers, and if, in the transaction, such broker-dealer charges the Fund
a rate consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, under rules recently adopted by the SEC,
Smith Barney may directly execute such transactions for the Funds on the floor
of any national securities exchange, provided (a) the Board of Trustees has
expressly authorized Smith Barney to effect such transactions, and (b) Smith
Barney annually advises the Trust of the aggregate compensation it earned on
such transactions. 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 Funds will not purchase any security, including U.S. government
securities, during the existence of any underwriting or selling group relating
thereto of which Smith Barney is a member, except to the extent permitted by the
SEC.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospectuses
applies to purchases made by any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's spouse and his or her children
purchasing shares for his or her own account; (c) a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary account; (d) a
pension, profit-sharing or other employee benefit plan qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and
qualified employee benefit plans of employers who are "affiliated persons" of
each other within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; and (f) a trustee or other
professional fiduciary (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares of a Fund for one or more trust estates or fiduciary accounts. Purchasers
who wish to combine purchase orders to take advantage of volume discounts on
Class A shares should contact a Smith Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospectuses,
apply to any purchase of Class A shares if the aggregate investment in Class A
shares of any Fund and in Class A shares of other funds of the Smith Barney
Mutual Funds that are offered with a sales charge, including the
purchase being made, of any purchaser is $25,000 or more. The reduced sales
charge is subject to confirmation of the shareholder's holdings through a check
of appropriate records. The Trust reserves the right to terminate or amend the
combined right of accumulation at any time after written notice
to shareholders. For further information regarding the combined
right of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Trust offers shares of the Funds to the public on a continuous basis. The
public offering price for Class A shares of the Funds is equal to the net asset
value per share at the time of purchase, plus for Class A shares
16
<PAGE> 17
a sales charge based on the aggregate amount of the investment. The public
offering price for Class B,
Class C, Class Y and Class Z shares of a Fund (and Class A share purchases,
including applicable right of accumulation, equalling or exceeding $500,000), is
equal to the net asset value per share at the time of purchase and no sales
charge is imposed at the time of purchase. A contingent deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class B and Class C
shares and of Class A shares when purchased in amounts equalling or exceeding
$500,000. The method of computation of the public offering price is shown in the
Funds' financial statements, which are incorporated by reference in their
entirety into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange, Inc. ("NYSE") is closed
(other than for customary weekend and holiday closings), (b) when trading in
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
such other periods as the SEC by order may permit for protection of the Fund's
shareholders.
DISTRIBUTIONS IN KIND
If the Board of Trustees of the Trust 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 rules adopted by
the SEC, any portion of a redemption in excess of the lesser of $250,000 or
1.00% of its net assets by distribution in kind of portfolio securities in lieu
of cash. Securities issued as a distribution in kind may incur
brokerage commissions when shareholders subsequently sell
those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 and who wish to
receive specific amounts of cash monthly or quarterly. Withdrawals of at least
$100 monthly may be made under the Withdrawal Plan by redeeming as many shares
of the Funds as may be necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by shareholders that
exceed 1.00% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts
withdrawn that do not
exceed 2.00% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences.) To the extent withdrawals exceed dividends,
distributions and appreciation of the shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment, and continued
withdrawal payments will reduce the shareholder's investment and may ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund. Furthermore, as it would not generally be advantageous to
a shareholder to make additional investments in a Fund at the same time
he or she is participating in the Withdrawal Plan, purchases
by such shareholders
in amounts of less than $5,000 ordinarily will not be permitted.
17
<PAGE> 18
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates with The
Shareholder Services Group, Inc. ("TSSG") as agent for Withdrawal Plan members.
All dividends and distributions on shares in the Withdrawal Plan are
automatically reinvested at net asset value in additional shares of a Fund.
Effective November 7, 1994, Withdrawal Plans should be set up with a Smith
Barney Financial Consultant. A shareholder who purchases shares directly through
TSSG may continue to do so and applications for participation in the Withdrawal
Plan must be received by TSSG no later than the eighth day of the month to be
eligible for participation beginning with that month's withdrawal. For
additional information, shareholders should contact a Smith Barney Financial
Consultant.
DISTRIBUTOR
Shares of the Trust are distributed on a best efforts basis by Smith Barney
as exclusive sales agent of the Trust pursuant to a written agreement (the
"Distribution Agreement").
When payment is made by the investor before 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 Smith Barney may benefit from the
temporary use of the Funds. The investor may designate another use for the funds
prior to settlement date, such as an investment in a money market fund (other
than Smith Barney Exchange Reserve Fund) of the Smith Barney Mutual Funds. If
the investor instructs Smith Barney to invest the funds in a Fund of the Smith
Barney money market fund , the amount of the investment will be
included as part of
the average daily net assets of both the Fund and the Smith Barney money market
fund, and affiliates of Smith Barney that serve the funds in an investment
advisory or administrative capacity will benefit from the fact they are
receiving fees from both such investment companies for managing
these assets
computed on the basis of
their average daily net assets. The Trust's Board of Trustees has been advised
of the benefits to Smith Barney resulting from these settlement procedures and
will take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
DISTRIBUTIONS ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Trust has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, the Trust pays Smith Barney with respect to each Fund 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 Fund's Class A,
Class B and Class C shares. In addition, the Trust pays Smith Barney a
distribution fee with respect to each Fund's Class B and Class C shares
primarily intended to compensate Smith Barney for its initial expense of paying
its Financial Consultants a commission upon sales of those shares. The Class B
and Class C distribution fee is calculated at the annual rate of .75% of the
value of a Fund's average net assets attributable to the shares of that Class.
During the fiscal years ended January 31, 1992, 1993 and 1994, the Trust
incurred $5,898,000, $5,808,234 and $6,380,987, respectively, in distribution
fees from Class B shares of the Trust under the Plan. For the fiscal year ended
January 31, 1994, the Trust incurred $2,015 in distribution fees under the Plan
from Class C shares. For the 1992, 1993 and 1994 fiscal years, the Trust
incurred $762,855, $838,080 and $868,000, respectively, representing a CDSC on
redemptions of Class B shares of the Trust. For the fiscal year ended January
31, 1994, the distribution expenses incurred by Smith Barney and its
predecessor,
18
<PAGE> 19
Shearson Lehman Brothers on Class B and Class C shares totaled approximately
$10,075,000, consisting of approximately $54,000 for advertising, $72,000 for
printing and mailing of Prospectuses, $718,000 for support services, $3,789,000
to Smith Barney Financial Consultants and $5,442,000 in accruals for interest on
the excess of Smith Barney Shearson's expenses incurred in distributing the
Trust's shares over the sum of the distribution fees and CDSC received by Smith
Barney from the Trust.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Trust's Board of Trustees,
including a majority of the Independent Trustees who have no direct or indirect
financial interest in the operation of the Plan or in the Distribution
Agreement. The Plan may not be amended to increase the amount of the service and
distribution fees without shareholder approval, and all material amendments of
the Plan also must be approved by the Trustees and such Independent Trustees 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 such Independent Trustees
or by a vote of a majority of the outstanding voting securities of the Class (as
defined in the 1940 Act). Pursuant to the Plan, Smith Barney will provide the
Trust's Board of Trustees with periodic reports of amounts expended under the
Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday through
Friday, except days on which the NYSE is closed. The NYSE currently is scheduled
to be closed on New Year's Day, 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 Trust in valuing
assets of the Funds.
A security that is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary market for such
security. All assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid and
offered quotations of such currencies against U.S. dollars as last quoted by any
recognized dealer. If such quotations are not available, the rate of exchange
will be determined in good faith by the Trust's Board of Trustees. In carrying
out the Board's valuation policies, SBMFM, as administrator, may consult with an
independent pricing service (the "Pricing Service") retained by the Trust.
Debt securities of domestic issuers (other than U.S. government securities
and short-term investments) are valued by SBMFM, as administrator, after
consultation with the Pricing Service approved by the Trust's Board of Trustees.
When, in the judgment of the Pricing Service, quoted bid prices for investments
are readily available and are representative of the bid side of the market,
these investments are valued at the mean between the quoted bid prices and asked
prices. Investments for which, in the judgment of the Pricing Service, there are
no readily obtainable market quotations are carried at fair value as determined
by the Pricing Service. The procedures of the Pricing Service are reviewed
periodically by the officers of the Funds under the general supervision and
responsibility of the Trust's Board of Trustees.
19
<PAGE> 20
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of the same class of other
funds of the Smith Barney Mutual Funds, to the extent such shares are offered
for sale in the shareholder's state of residence, on the basis of relative net
asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be
exchanged for Class A shares of any of the other funds, and the sales
charge differential, if any, will be applied. Class A shares of any fund
may be exchanged without a sales charge for shares of the funds that are
offered without a sales charge. Class A shares of any fund purchased
without a sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for Class A shares of
any of the other funds, and the sales charge differential, if any, will be
applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of a Fund exchanged for Class B shares of another
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.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the account
number in order to accomplish an exchange of shares of High Income Fund under
paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe that a
shift between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and, subject to any applicable CDSC, the proceeds are immediately
invested, at a
price as described above, in shares of the fund being acquired. Smith Barney
reserves the right to reject any exchange request. The exchange privilege may be
modified or terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote total return of the Classes of the
various Funds in advertisements or in reports and other communications to
shareholders. The Fund may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include the following industry and financial publications: Barron's, Business
Week, CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent any
20
<PAGE> 21
advertisement or sales literature of the Funds describes the expenses or
performance of Class A, Class B, Class C or Class Y, it will also disclose such
information for the other Classes.
<TABLE>
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
<S> <C> <C> <C>
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 payment
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.
</TABLE>
<TABLE>
The average annual total returns of the Funds' Class A shares were as
follows for the periods indicated:
Class A Shares:
<CAPTION>
PER ANNUM
FOR THE PERIOD
FROM COMMENCEMENT OF
ONE YEAR PERIOD OPERATIONS* THROUGH
NAME OF FUND ENDED 7/31/94 7/31/94
- ------------------------------------------------------ --------------- ---------------------
<S> <C> <C>
Strategic Investors................................... (0.70)% 7.75%
Growth and Income..................................... (1.67) 0.93
<FN>
- ---------------
*The Funds commenced selling Class A shares on November 6, 1992.
</TABLE>
<TABLE>
The average annual total returns of the Funds' Class B shares were as
follows for the periods indicated:
Class B Shares:
<CAPTION>
PER ANNUM
FOR THE PER ANNUM
FIVE YEAR FOR THE PERIOD
ONE YEAR PERIOD FROM COMMENCEMENT
PERIOD ENDED ENDED OF OPERATIONS THROUGH
NAME OF FUND 7/31/94 7/31/94 7/31/94
- ------------------------------------------ ---------------- ---------- ---------------------
<S> <C> <C> <C>
Strategic Investors(1).................... (0.85)% 8.66% 9.61%
Growth and Income(2)...................... (2.05) -- 1.16
<FN>
- ---------------
(1) Fund commenced operations on February 2, 1987.
(2) Fund commenced operations on November 6, 1992.
</TABLE>
21
<PAGE> 22
<TABLE>
The average annual total return of the Class C shares of the Strategic
Investors Fund was as follows for the period indicated:
Class C Shares:
<CAPTION> ONE YEAR
PERIOD* ENDED
NAME OF FUND 7/31/94
- ------------------------------------------------------------------------------- -------------
<S> <C>
Strategic Investors............................................................ 2.81%
<FN>
- ---------------
* The Fund commenced selling Class C shares (previously designated as Class D shares) on January 29, 1993.
Average annual total return figures calculated in accordance with the above
formula assume that the maximum 5% sales charge or maximum CDSC, as the case may
be, has been deducted from the hypothetical investment. A Fund's net investment
income changes in response to fluctuations in interest rates and the expenses of the Fund.
</TABLE>
<TABLE>
AGGREGATE TOTAL RETURN
"Aggregate total return" figures represent the cumulative change in the value of
an investment in the Class for the specified period and are computed by the
following formula:
<S> <C> <C>
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.
</TABLE>
<TABLE>
The aggregate total returns (with fees waived) of the Class B shares were
as follows for the periods indicated:
<CAPTION> NO LOAD LOAD
---------------------------------------------------------------------
PERIOD FROM PERIOD FROM
COMMENCEMENT FIVE COMMENCEMENT
ONE YEAR FIVE YEAR OF ONE YEAR YEAR OF
PERIOD PERIOD OPERATIONS PERIOD PERIOD OPERATIONS
ENDED ENDED THROUGH ENDED ENDED THROUGH
7/31/94* 7/31/94* 7/31/94* 7/31/94** 7/31/94** 7/31/94**
<S> <C> <C> <C> <C> <C> <C>
NAME OF FUND
- --------------------------
Strategic Investors(1).... 3.69% 52.48% 98.85% (0.85)% 51.51% 98.85%
Growth and Income(2)...... 2.95 -- 6.05 (2.05) -- 2.02
<FN>
- ---------------
* Figures do not include the effect of the maximum sales charge or maximum
applicable CDSC. If they had been included, it would have had the effect of
lowering the returns shown.
** Figures include the effect of the maximum sales charge or maximum applicable
CDSC.
(1) The Fund commenced operations on February 2, 1987.
(2) The Fund commenced operations on November 6, 1992.
</TABLE>
22
<PAGE> 23
<TABLE>
The aggregate total returns (with fees waived) of the Class A and Class C
shares of the Funds were as follows for the periods indicated:
<CAPTION>
NO LOAD
------- LOAD
PERIOD FROM ----
NO LOAD LOAD COMMENCEMENT PERIOD FROM
------- ---- OF COMMENCEMENT
ONE YEAR ONE YEAR OPERATIONS* OF OPERATIONS*
PERIOD ENDED PERIOD ENDED THROUGH THROUGH
1/31/94* 1/31/94** 1/31/94* 1/31/94**
<S> <C> <C> <C> <C>
NAME OF FUND
- ------------------------------
Strategic Investors
Class A+................. 4.53% (0.70)% 19.81% 13.82%
Class C++................ 3.71 2.81 -- --
Growth and Income
Class A+................. 3.51 (1.67) 6.96 1.61
<FN>
- ---------------
* Figures do not include the effect of the maximum sales charge or maximum
applicable CDSC. If they had been included, it would have had the effect of
lowering the returns shown.
** Figures include the effect of the maximum sales charge or maximum applicable
CDSC.
+ The Fund commenced selling Class A shares on November 6, 1992.
++ The Fund commenced selling Class C shares (previously designated as Class D
shares) on January 29, 1993.
</TABLE>
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance.
A Class' performance will vary from time to time depending on market
conditions, the composition of the relevant Fund's portfolio and operating
expenses and the expenses exclusively attributable to that Class. Consequently,
any given performance quotation should not be considered representative of the
Class' performance for any specified period in the future. Because performance
will vary, it may not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed yield for a
stated period of time. Investors comparing the Class' performance with that of
other mutual funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Funds and their shareholders. This summary is not
intended as a substitute for individual tax advice, and investors are urged to
consult their own tax advisors as to the tax consequences of an investment
in any Fund of the Trust.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for Federal income tax
purposes with the result that: (a) each Fund must meet separately the income and
distribution requirements for qualification as a regulated investment company
and (b) the amounts of investment income and capital gains earned will be
determined on a Fund-by-Fund (rather than on a Trust-wide) basis.
TAXATION OF SHAREHOLDERS
Dividends paid by a Fund from investment income and distributions of short-term
capital gains will be taxable to shareholders as ordinary income for Federal
income tax purposes, whether received in cash or
23
<PAGE> 24
reinvested in additional shares. Distributions of long-term capital gains will
be taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in additional shares, and regardless of the length of time the
investor has held his or her shares of the Fund.
Dividends of investment income (but not capital gains) from any Fund
generally will qualify for the Federal dividends-received deduction for
corporate shareholders to the extent such dividends do not exceed the aggregate
amount of dividends received by the Fund from domestic corporations. If
securities held by a Fund are considered to be "debt-financed" (generally,
acquired with borrowed funds), are held by the Fund for less than 46 days (91
days in the case of certain preferred stock), or are subject to certain forms of
hedges or short sales, the portion of the dividends paid by the Fund that
corresponds to the dividends paid with respect to such securities will not be
eligible for the corporate dividends-received deduction.
If a shareholder (a) incurs a sales charge in acquiring shares of a Fund,
(b) disposes of those shares within 90 days and (c) acquires shares in a mutual
fund for which the otherwise applicable sales charge is reduced by reason of a
reinvestment right (that is, an exchange privilege), the sales charge increases
the shareholder's tax basis in the original shares only to the extent the
otherwise applicable sales charge for the second acquisition is not reduced. The
portion of the original sales charge that does not increase the shareholder's
tax basis in the original shares would be treated as incurred with respect to
the second acquisition and, as a general rule, would increase the shareholder's
tax basis in the newly acquired shares. Furthermore, the same rule also applies
to a disposition of the newly acquired or redeemed 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.
Capital Gains Distribution. In general, a shareholder who redeems or
exchanges his or her shares will recognize long-term capital gain or loss if the
shares have been held for more than one year, and will recognize short-term
capital gain or loss if the shares have been held for one year or less. If a
shareholder receives a distribution taxable as long-term capital gain with
respect to shares of a Fund and redeems or exchanges the shares before he or she
has held them for more than six months, any loss on such redemption or exchange
that is less than or equal to the amount of the distribution will be treated as
long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend and interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to withholding, then the shareholder
may be subject to a 31% Federal backup withholding tax with respect to (a) any
dividends and distributions and (b) any proceeds of any redemptions or
exchanges. An individual's taxpayer identification number is his or her social
security number. The backup withholding tax is not an additional tax and may be
credited against a shareholder's regular Federal income tax liability.
REGULATED INVESTMENT COMPANY STATUS
Each Fund intends to continue to qualify in subsequent years as a regulated
investment company within the meaning of Section 851 of the Code. The Trust will
monitor each Fund's investments so as to meet the requirements for qualification
on a continuing basis.
As a regulated investment company, a Fund will not be subject to Federal
income tax on the net investment income and net capital gains, if any, that it
distributes to its shareholders, provided that at least
24
<PAGE> 25
90% of the sum of investment income and short-term capital gains is distributed
to its shareholders. All net investment income and net capital gains earned by a
Fund will be reinvested automatically in additional shares of the Fund, unless
the shareholder elects to receive dividends and distributions in cash. Amounts
reinvested in additional shares will be considered to have been distributed to
shareholders.
To qualify as a regulated investment company, each Fund must meet certain
requirements set forth in the Code. One requirement is that each Fund must earn
at least 90% of its gross income from (a) interest, (b) dividends, (c) payments
with respect to securities loans, (d) gains from the sale or other disposition
of stock or securities or foreign currencies and (e) 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
(the "90% Test"). An additional requirement is that each Fund must earn less
than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months (the "30% Test"). Legislation
currently pending before the U.S. Congress would repeal the 30% Test. However,
it is impractical at this time to predict whether this legislation will become
law and, if it is so enacted, what form it will eventually take.
Each Fund will invest in a combination of common stock, preferred stock,
notes and bonds and will earn interest and dividend income, gains from the sale
of such securities, and income from repurchase agreements entered into with
respect to such securities, all of which generally would be considered to be
qualified income under the 90% Test. Each Fund generally will hold its
investments longer than three months and therefore should not risk
disqualification under the 30% Test. Depending upon the circumstances, however,
a Fund may be limited in the extent to which it may: (a) sell securities held
for less than three months; (b) effect short sales of securities that are
identical (or substantially identical) to securities held by it for less than
three months; (c) write options that expire in less than three months; and (d)
effect closing transactions with respect to call or put options that have been
written or purchased within the preceding three months. A Fund's gain or loss
from the sale (including open short sales) or other dispositions of stock or
securities (with the term "securities" defined to include put and call options)
held for less than three months will be netted against its gain or loss on
positions that are part of a "designated hedge" with respect to such three-month
investments.
TAXATION OF FUND INVESTMENTS
Gain or loss on the sale of a security by a Fund generally will be long-term
capital gain or loss if the Fund has held the security for more than one year.
Gain or loss on the sale of a security held for not more than one year generally
will be short-term capital gain or loss. If a Fund acquires a debt security at a
substantial discount, a portion of any gain upon sale or redemption of such debt
security will be taxed as ordinary income rather than capital gain to the extent
it reflects accrued market discount.
Options Transactions. The tax consequences of options transactions entered
into by a Fund will vary depending on whether the underlying security is held as
a capital asset, whether the Fund is writing or purchasing the option and
whether the "straddle" rules, discussed separately below, apply to the
transaction.
A Fund may write a call option on an equity or convertible debt security.
If the option expires unexercised or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain or loss without regard to any
unrealized gain or loss on the underlying security. Generally, any such gain or
loss will be short-term capital gain or loss, except that any loss on certain
covered call stock options will be treated
25
<PAGE> 26
as long-term capital loss. If a call option written by a Fund is exercised, the
Fund will treat the premium received for writing such call option as additional
sales proceeds and will recognize a capital gain or loss from the sale of the
underlying security. Whether the gain or loss will be long-term or short-term
will depend on the Fund's holding period for the underlying security.
If a Fund purchases a put option on an equity or convertible debt security
and it expires unexercised, the Fund will realize a capital loss equal to the
cost of the option. If a Fund enters into a closing sale transaction with
respect to the option, it will realize a capital gain or loss and such gain or
loss will be short-term or long-term depending on the Fund's holding period for
the option. If a Fund exercises such a put option, it will realize a short-term
or long-term capital gain or loss (depending on the Fund's holding period for
the underlying security) from the sale of the underlying security. The amount
realized on such sale will be the sales proceeds reduced by the premium paid.
Mark-to-Market. The Code imposes a special "mark-to-market" system for
taxing "Section 1256 contracts" including options on nonconvertible debt
securities (including U.S. government securities), options on certain stock
indexes and certain foreign currency contracts. In general, gain or loss on
Section 1256 contracts will be taken into account for tax purposes when actually
realized (by a closing transaction, by exercise, by taking delivery or by other
termination). In addition, any Section 1256 contracts held at the end of the
taxable year will be treated as though they were sold at their year-end fair
market value (that is, "marked to market"), and the resulting gain or loss will
be recognized for tax purposes. Provided that a Fund holds its Section 1256
contracts as capital assets and they are not part of a straddle, both the
realized and the unrealized year-end gains or losses from these investment
positions (including premiums on options that expire unexercised) will be
treated as 60% long-term and 40% short-term capital gain or loss, regardless of
the period of time particular positions have actually been held by a Fund.
A portion of the mark-to-market gain on instruments held for less than
three months at the close of a Fund's taxable year may represent a gain on
securities held for less than three months for purposes of the 30% Test
discussed above. Accordingly, the Funds may restrict their fourth-quarter
transactions in Section 1256 contracts.
Straddles. The Code contains rules applicable to "straddles," which are
"offsetting positions in actively traded personal property," including equity
securities and options of the type in which a Fund may invest. If applicable,
the "straddle" rules generally override the other provisions of the Code. In
general, investment positions will be offsetting if there is a substantial
diminution in the risk of loss from holding one position by reason of holding
one or more other positions. The Funds generally are authorized to enter into
put, call, and covered put and call positions. Depending on what other
investments are held by a Fund at the time it enters into one of the above
transactions, a Fund may create a straddle for Federal income tax purposes.
If two (or more) positions constitute a straddle, recognition of a realized
loss from one position (including a mark-to-market loss) must be deferred to the
extent of unrecognized gain in an offsetting position. Interest and other
carrying charges allocable to personal property that is part of a straddle must
be capitalized. In addition, "wash sale" rules apply to straddle transactions to
prevent the recognition of loss from the sale of a position at a loss when a new
offsetting position is or has been acquired within a prescribed period. To the
extent the straddle rules apply to positions established by a Fund, losses
realized by the Fund may be deferred or recharacterized as long-term losses, and
long-term gains realized by the Fund may be converted to short-term gains.
26
<PAGE> 27
If a Fund chooses to identify a particular offsetting position as being one
component of a straddle, a realized loss on any component of that straddle will
be recognized no earlier than upon the liquidation of all components of that
straddle. Special rules apply to "mixed" straddles (that is, straddles
consisting of a Section 1256 contract and an offsetting position that is not a
Section 1256 contract). If the Trust makes certain elections, all or a portion
of the Section 1256 contract components of such mixed straddles of a Fund will
not be subject to the 60%/40% mark-to-market rules. If any such election is
made, the amount, the nature (as long-term or short-term) and the timing of the
recognition of the Fund's gains or losses from the effected straddle positions
will be determined under rules that will vary according to the type of election
made.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
The Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
January 8, 1986, as amended from time to time (the "Trust Agreement"). The Trust
commenced business as an investment company on March 3, 1986, under the name
Shearson Lehman Special Equity Portfolios. On December 6, 1988, August 27, 1990,
November 5, 1992, July 30, 1993 and October 14, 1994, the Trust changed its name
to SLH Equity Portfolios, Shearson Lehman Brothers Equity Portfolios, Shearson
Lehman Brothers Equity Funds, Smith Barney Shearson Equity Funds and Smith
Barney Equity Funds, respectively.
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly
owned subsidiary of Mellon, is located at One Boston Place, Boston,
Massachusetts 02108, and serves as custodian for the Funds. Under its custodial
agreement with the Trust, Boston Safe is authorized to appoint one or more
foreign or domestic banking institutions as sub-custodians of assets owned by a
Fund. For its custody services, Boston Safe receives monthly fees charged to
each Fund based upon the month-end, aggregate net asset value of the Fund, plus
certain charges for securities transactions. The assets of the Trust are held
under bank custodianship in accordance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation, is located at Exchange Place,
Boston, Massachusetts 02109, and serves as the Trust's transfer agent. For its
services as transfer agent, TSSG receives fees charged to the Funds at an annual
rate based upon the number of shareholder accounts maintained during the year.
TSSG also is reimbursed by the Funds for its out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Semi-Annual and Annual Reports for the semi-annual period ended July
31, 1994 and the fiscal year ended January 31, 1994 are incorporated into this
Statement of Additional Information by reference in their entirety.
27
<PAGE> 28
APPENDIX
DESCRIPTION OF S&P AND MOODY'S RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA--Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B AND CCC--Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B and CCC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium grade obligations,
that is, they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
28
<PAGE> 29
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Capacity for
timely payment on commercial paper rated A-2 is strong, but the relative degree
of safety is not as high as for issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
29
<PAGE> 30
Smith Barney
EQUITY FUNDS
<TABLE>
<S> <C>
-----------------------------
STRATEGIC INVESTORS FUND
-----------------------------
-----------------------------
GROWTH AND INCOME FUND
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
-----------------------------
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
SMITH BARNEY
EQUITY FUNDS
LOGO
388 Greenwich Street
New York, New York 10013
</TABLE>
